Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

16.2 Cost Estimating

Intended learning outcomes: Present an algorithm for cost estimation of goods manufactured. Produce a representation of the cost accumulation and an overview of the comprehensive calculation for a product line.

16.2.1 An Algorithm for Cost Estimation of Goods Manufactured

Cost estimating for cost of goods manufactured is based on the master data. We can illustrate this using an example product, a ball bearing, according to Figure

Fig.       A ball bearing as an example product.

The ball bearing (Item ID 83569) consists of two compo­nents, a ring (item ID 83593, a semifinished product manufactured in-house) and Uniflon (item ID 83607, a purchased raw material). The bill of material for the product thus has two positions. It is produced in two operations: cut Uniflon (position 250 at work center ID 907501, “manual production”) and press together (position 270 at work center ID 908301, “special pressing”). The routing sheet for the product thus contains two operations. In the case under consideration, there are other components, or operations. For the sake of simplicity, however, only these two components (respectively, these two operations) are listed here.

To obtain the costs per unit produced, we must either add together the costs for the entire batch and divide them by the batch size, or divide the setup load of each operation by the batch size.

To estimate the costs, we must then calculate the costs for each of the cost types in Section 16.1.4. For the sake of simplicity, the algorithm in Figure uses only three cost types as illustrations.

Fig.       Algorithm for estimating the cost of a product (shown for three cost types).

Figure shows the data flow of the cost-estimating algorithm described above.

Fig.       Algorithm for estimating the cost of a product.

The three steps outlined above are shown in the gray section. The spreadsheet section shows the item (first table with three objects) and work center (fourth table with two objects) business objects. The bill of material business object (second table) is divided into detailed logistics objects, specifically into bill-of-material positions corresponding to the components. The operations are shown for the routing sheet busi­ness object (third table). See also the detailed description of the object and entity classes in Sections 17.2.1 to 17.2.8, in particular the Figures and The arrows in Figure indicate the sources and usage of the data in the individual calculations.

16.2.2 Representation of the Cost Accumulation and Comprehensive Calculation for a Product Line

Figure shows one possible way of representing the results of the (single-stage) cost accumulation for an individual product. Here, again, the ball bearing product from Section 16.2.1 is used as an example.

Fig.       Graphical representation of the cost accumulation for a product.

In this graphical representation, you can see that this is an estimated-cost accumulation, as only the target costs column has been completed. For on­going job-order cost accumulation, we would enter data collected from the shop floor into the actual column. Division by the batch size is performed only at the very end. However, first the run load per unit must be multi­plied by the batch size. Compare the results of the calculation for batch size 5000 with the calculation in Figure (where batch size is 100).

If the bill of material for a product contains components produced in-house, the costs must be estimated for these items first. Only then should we calculate the costs for the product itself into which the components are built. This is best achieved by estimating the costs for all components, vertically along the tree structure, using a depth-first search. Once we have estimated the costs for all the components at one level, we can estimate the costs for the higher-level product when we return to the next highest level of the tree structure.

If the entire line of products has to be recalculated, it is more efficient to take the individual items in descending order of their low-level code. We start by calculating the costs for individual parts and subassemblies at the lowest possible level and end with the finished product. We can proceed in this order, because we have already calculated the level codes.

For components produced to order, which are produced on demand for the higher-level product rather than being stored, we can integrate the cost accumulation for each component directly into the cost accumulation for this product. Since the batch that is produced depends on the product batch, the result will be different every time.

If the end product is a product family with many variants, rather than a stock item, we can combine different parameter values in the cost estimation. In this way, we can calculate various points of support for product costs in the n-dimensional parameter space. These combinations of parameter values should then be stored in parameter value lists under the item object and introduced into the estimated-cost accumulation as shown in Figure

Course sections and their intended learning outcomes

  • Course 16 – Cost Estimating, Job-Order Costing, and Activity-Based Costing

    Intended learning outcomes: Produce a review on costs, cost elements, and cost structures. Explain cost estimating in detail. Describe job-order costing. Disclose activity-based costing.

  • 16.1 Costs, Cost Elements, and Cost Structures

    Intended learning outcomes: Produce an overview on actual, direct, and overhead costs. Differentiate between average costs and standard costs as well as between variable costs and fixed costs. Explain the cost accumulation breakdown that is the cost breakdown structure of a product.

  • 16.2 Cost Estimating

    Intended learning outcomes: Present an algorithm for cost estimation of goods manufactured. Produce a representation of the cost accumulation and an overview of the comprehensive calculation for a product line.

  • 16.3 Job-Order Costing

    Intended learning outcomes: Describe actual quantities and actual costs. Explain cost analysis. Produce an overview on the interface from order management to cost accounting.

  • 16.4 Activity-Based Costing

    Intended learning outcomes: Disclose the limits of traditional product costing. Explain activity-based costing: aim, basic premise, requirements, and technique. Present typical processes (activities) and process variables as well as the activity-based product cost estimation.

  • 16.5 Summary


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