Estimate Cost

how much does

it cost to make
a box of
matches?
 Match and Box 2 mm

head of the match

fir wood impregnated with paraffin

head with KClO3 crystals

and colouring in a binder

side of the box

rough print containing red
phosphorous particles

2 P + 53 KClO3 P2O5 + 53 KCl

+ 1.7 MJ mol-1
 The Process
P wood KClO3
binder binder
grit cut grit

mix wax

card-
print dip mix
board

fold dry

glue pack

box with matches

Costs BOM: bill of materials

materials P KClO3 wood binder grit cardboard

utilities steam, water, electricity

equipment to mix, print, fold, cut…, the building

operators to run the equipment

hired-in installation, maintenance, transport, marketing…

administration personnel, finances, sales…
engineering to develop

marketing to market, sell

management to supervise
 The Many Costs
huge number of transactions
requires
easy to get lost admini-
even worse with multiple products stration
several ways of grouping costs
to retain overview
 Cost Grouping 1

direct cost for one product

three
groups: indirect cost for all products

depreciation for wear and age

every division is a bit arbitrary

 Direct Cost
costs easily assigned to one product

ingredients (for matter)

parts (for devices)
process energy
direct labour
dedicated equipment
marketing and sales
Indirect Cost (Overhead)
costs divided over many products
management
administration
shared equipment
maintenance
shared utilities
costs divided via 'cost drivers':
use of raw materials
use of labour
total sales…
 Depreciation
assets for production or services
buildings
plant equipment these gradually
computers lose value
(wear, ageing)
investment in product
development

taken into account as a depreciation cost

often a fixed percentage per year (till 'write-off')

 Cost Grouping 2
total cost versus production

cost of all operations for a given plant

fixed cost
two groups: independent of production
variable cost
proportional to production

every division is a bit arbitrary

 Fixed Cost
dedicated equipment
(total)
cost (depreciation, maintenance)

TC product development
(depreciation)
'fixed' personnel
fixed cost
FC 'fixed' contracts

units sold US overhead on personnel

 Variable Cost

(total) variable cost

cost VC VU variable cost per unit
TC materials, parts
energy
VC = VU × US hired personnel
marketing, sales
units sold US
most 'overhead'
 (Total) Cost

(total)
cost VC
TC

TC = FC + VC
FC

units sold US
 Sales and Price

sales
S

price = constant
PU price
(per unit)

units sold US S = PU × US
 Cost – Sales – Profit
CSP Analysis assumes

steady state
stable conditions
no inventory
firm has
linear cost-sales
(single product)
 Factory Parameters
fixed costs variable costs
price of equipment 10M price of wood 1 kg-1
maintenance 5% yr-1 price of chlorate 1 kg-1
depreciation 5% yr-1 price of phosphorous 100 kg-1
price of development 0M price of cardboard 1 kg-1
fixed personnel 50k yr-1 price of binder 1 kg-1
30 people price of energy 30 GJ-1
transport 200k yr-1 hired personnel none
overhead personnel 25 % yr-1 marketing, sales 0.001 unit-1
overhead materials 25% yr-1
 30 Cost
overhead
cost M / yr sales
cardboard
20 phosphorous
wood
personnel
10
maintenance
equipment
depreciation
0
units sold
0 200 400 600
millions / yr
 30 Sales
sales M / yr
sales price ≠ shop price
20 value added tax 20%
gross margin super-
price per unit market 40%
0.092
gross margin trade
10
30%

0
units sold
0 200 400 600
millions / yr
 30
Break- sales
even RM / yr cost
Point 20
profit before tax
corporate tax ≈
30%
10

units sold
millions / yr
0
0 200 400 600
 1.0
Economy of Scale
price per unit RM

0.5

units sold
millions / yr

0
0 200 400 600
 Finding Cost (1)
working back from prices very uncertain
experience in the firm if your firm knows
external data, quotations often incomplete

expect to spend time on

getting costs in a new field
 Summary
a firm has large numbers
of costs and revenues

costs grouped in two ways:

direct – indirect – depreciation
to keep overview of firm
fixed – variable
to understand your product
cost estimation difficult for beginner
revenue estimation difficult for
everybody