Cost estimating & Costing

• The purpose of cost estimating is to find
the cost of the manufacturing operations
and to assist in setting the price for the
product

 Cost estimating may be defined as the process of
determining the probable cost of the product
before the start of manufacture

 Important activity in engineering design and production
 It is forecasting the future cost
 Cost estimating & process planning are prominent activities
in the manufacturing system
 It considers all the expenditures involved like engineering,
administration, etc
 It requires high technical knowledge

 The only accurate estimating can enable the leaders to
make vital decisions such as manufacturing, selling policies
Case1
 If job is over estimated,
› The firm will not be able to compete with its competitors
 If the job is under estimated,
› The firm will face huge financial loss

 To establish the selling price of a product, so as to ensure
reasonable profit to the company
 To determine the most economical process
 To make/buy decisions
 To evaluate the alternate designs
 To prepare production budget
 To initiate the cost reduction in existing facilities

 To fix the selling price of the product
 To help the contractors to submit the accurate tenders
 To forecast the progress of production and cost
 To set the various Standards

 Design cost
 Drafting cost
 R & D cost
 Material cost
 Labor cost
 Inspection cost
 Cost of tools, jigs, fixtures, etc.
 Overhead cost

 Design cost of the product is estimated by ascertaining the
expected time for the design of that product
Estimated Design cost = Estimated design time x salary of the
designer per unit time
 Design time can be estimate on the basis of similar products
already designed or on the basis of good judgement of
designer
 If design done by outside agency, the total amount paid –
gives the cost of design

 When the design completed, the drawing will be prepared
by the draftsman
Drafting cost = Estimated draft time x salary of the draftsman
per unit time

 Considerable time and money has to be spent on research
and developmental work
 The estimated cost and time on it are decided by the
judgement or the past experience

 Following steps involved
› Prepare the list of all materials required to manufacture the product
› Estimate the weight of all the materials expected (the allowance for the
material wastage, spoilage and scrap are also added )
Estimated materials cost = Estimated weight of each part x
Estimated future price
› Finally, the estimated cost of all the parts is added to get the total
estimated material cost of the product

 Following steps involved
› To estimate the labour cost, the estimator should have the knowledge of
various operations, machines, sequence, tools & labour to be used.
Labour cost = Estimated labour time needed to the product x
Cost of the labour per hour

 During this stage, the estimator should consider the cost of
inspection equipments, gauges and wages to the inspectors

 During this stage, includes the estimated cost and
maintenance charges for the tools, jigs, fixtures, die etc.
required for production
 It considers their present prices, market trend and the
number of times a particular tool can be used during its life
time

 This can not be charged directly
 All expenses other than direct cost are known as overhead
cost or Indirect expenses, ex:- Administrative expenses, selling
and distribution expenses, etc.
 It can be estimated by referring the previous records

Step 1
 Study the cost estimation request thoroughly and understand it completely
Step 2
 Analyze the product and decide the requirements and specifications of the
product
Step 3
 Prepare the list of all the parts of the product and their bill of Materials
Step 4
 Take make or buy decisions and prepare a separate list of parts to be
purchased &manufactured
Step 5
 Estimate the materials cost for the parts to be manufactured in the plant
Step 6
 Determine the cost of the parts to be purchased from outside
Step 7
 Make a manufacturing process plan for the parts to be manufactured in the
plant

Step 8
 Estimate the machining time for each operations listed in the manufacturing
process plan
Step 9
 Determine the direct labour cost
Step 10
 Determine the prime cost by adding direct expenses, direct material cost,
and direct labour cost
prime cost = direct expenses + direct material cost + direct labour cost
Step 11
 Estimate the factory overheads, which include all indirect expenditure
incurred during production such as indirect material cost, indirect labour
cost, depreciation and expenditure on maintenance of the plant,
machinery, power, etc.
Step 12
 Estimate the administrative expenses

Step 13
 Estimate the selling and distribution expenses, which include packing and
delivery charges, advertisement charges, etc.
Step 14
 Now calculate the total cost of the product
Total cost = Prime cost + Factory overheads + Administrative expenses +
Selling and distribution expenses
Step 15
 Decide the profit and add the profit to the total cost to fix the selling price of
the part
Selling price = Total cost + Profit
Step 16
 Finally estimate the time of delivery in consultation with the production and
sales department

 After estimating all the elements of cost, these estimated data's entered into
an estimate form

Estimate Form
Description Date
Drawing No Enquiry No
Lot size
___________
Components Customer
Estimated by
S.No. Item of Expenditure Total cost for the entire Lot Cost/ Component
1
Direct Material cost/Component

1
2
3
Total
2
Labour cost/component

1
2
3
Total
3 Other Direct Expenses
4 Factory Expenses
5 Administrative Expenses
6
selling and distribution expenses

1 Packing
2 Advertising
3 Other alined expenses
Total
7 Total cost/component
8 Profit
Usually as a% of total cost / component
9 Total ( selling price / component )

• Costing is the determination of an actual
cost of a component after adding
different expenses incurred in various
departments

• Costing may be defined as a systematic
procedure for recording accurately
every item of expenditure incurred on
the manufacture of a product by
different sections of any manufacturing
concern

Cost determination:-
 To determine the actual cost of each cost of each component and
cost of the final product
For fixing selling price:-
 To provide information to ascertain the selling price of the product
Cost control:-
 To analyze the expenses incurred in production, so that control can
be kept over them
Comparison with estimate:-
 To compare the actual cost with the estimated cost to know
whether the estimate had been realistic or not
Make or buy decisions:-
 To decide which of the components to be manufactured and
which parts to be purchased from outside

Wastage reduction:-
 To help in detecting the undesirable wastages and expenses, so
that corrective measures can be taken
Suggest changes in design:-
 To provide changes, if the cost of part is higher as compared to the
competing product
Profit & Loss:-
 To locate the reasons for the increase or decrease in profit or loss of
a company
Fixing the discount:-
 To help in determining the discount on catalogue or market price of
the product
Pricing policy:-
 To help in formulating the policies for changing/price of the product

Budject preparation:-
 To the enterprise to prepare its budget
Prepare quotations/tenders:-
 To facilitate preparation of estimate for submitting
quotations/tenders
Output targets:-
 To help in regulating, from time to time, the production of a job so
that the enterprise can earn more profits
Legal provisions:-
 To meet certain legal and government regulations, cost data is
necessary
Purchasing new one:-
 To provide information for economic consideration for purchasing
new plants/machines, etc.

Job/order costing:-
 Find the cost of the each individual job/contract
 The total cost of each order is obtained from the daily cost sheet
Example:- ship building, machine fabricarion, building, etc.
Batch costing:-
 Batch costing is a form of job costing
 Instead of costing each components, each batch of components is
taken
Example:- automobile switches, Plastic components, etc.
Process costing :-
 Employed for a product which involved a number of distinct process
performed in a definite sequence
 This method indicates the cost of a product at different stages as it
passes through various operations
 Example:- Oil refining, chemical, cement, paint, paper making

Departmental costing:-
 This method is adopted in determining the cost of the cost of the
output of each department separately
 In this method, the actual expenditure of each department on various
components is entered on a separate sheet
Example:- steel industry, automobile industry, etc.
Operating costing:-
 This method is used in firms providing utility services
Example:- water service, electricity board, transport services, etc.
Unit costing :-
 This method is adopted by the firms, which supply a uniform product
rather than a variety of products
Example:- mines, quarries, etc.
Multiple costing :-
 This method is adopted where manufacture of standardized products
having no relation to one another in cost, quality and process, etc.

S.no. Particular Estimating Costing
1 Nature of cost Probable cost Actual cost
2 Personnel High Technical knowledge Knowledge of accounts
3 Process duration Before the production Starts with issue of order
Ends with product
dispatched on sale
4 Organization
department
Planning Department Accounting department

Cost estimating & Costing

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