COST ESTIMATION

• A plant design must present a process

That is capable of operating under condition
 which will yield a profit.
 Profit = Total Income – All Expenses
• Many different types of the cost involve in
manufacturing process.
•The expenses are divided into two groups.

1
 COST ESTIMATION
• Direct plant expenses:
 Raw material ,
 Labor ,
 Equipment etc .
• Indirect expenses:
 Administrative salaries ,
 Product distribution cost ,
 Communication cost etc .

2
 Cash flow for industrial
operation
The capital source includes all funds
necessary to get the project underway:
The funds are obtain from the following
1.Bonds and fixed deposit
2.Common stocks
3.Loans from bank
4.Net cash flow to capital sink
5.Other capital input

3
 Cash flow for industrial
operation
The capital outgoing from the funds:

1.Industrial operation
2.Dividend to stock holders
3.Interest on loan
4.Repayment of loan
5.Repayment of bond and fixed deposit
6.Other investment
7.Land value or cost
4
 CAPITAL INVESTMENT
• A capital investment is required for any
industrial process.
 Fixed capital investment :
 The capital required for physical equipments
and facilities in plant.
 Working capital investment :
 The capital requires for salaries ,
 To keep stock of raw materials and products
on hand
 Other direct cash outlay. 5
Gross profit =
 Income from sale – Cost of operation
 Net profit before taxes
 Si-Co-D
 Net profit after taxes
 Si-Co-d-tx
Net profit and depreciation is cash flow the
project and returned to funds .

6
TOTAL CAPITAL INVESTMENT :
• For an industrial plant:
A large sum of money is required to:
 To purchase and install the necessary machinery
and equipment
 To purchase land and service facilities
 To complete all piping, control system etc
•In addition, it is necessary to have
Money available for the payment of expenses
involved in the plant operation

7
 CAPITAL INVESTMENT

• The total capital investment includes:

 Manufacturing fixed capital investment for

project
 Non manufacturing fixed capital investment
 Working capital

8
 MANUFACTURING FIXED CAPITAL

• Manufacturing fixed capital investment

• It is the capital required for
– The necessary manufacturing and plant
facilities
• The capital necessary for the installed
process equipment
– With all necessary auxiliaries for complete
process operation

9
 Fixed Capital Investment
• Other Expenses like :
Piping, insulation,
foundation,
site presentation
• Also included in the manufacturing fixed
capital investment

10
 Nonmanufacturing fixed capital
• Nonmanufacturing fixed capital investment
– The capital required for construction overhead
– All plant components that are not directly related to
the process operation.

• The items which are included are:

– Process building, administrative and other offices,
– Warehouses and laboratory,
– Transportation, utilities and waste disposal facilities

11
 WORKING CAPITAL
• Total money invested in
– Raw materials and supplies carried in stock.
– The stock of raw material is generally made for one month
supply.
– Finished product stock is also made for one month production.
– Cash kept on hand for monthly payments of operating expenses
• such as salaries, wages, R/M purchase, etc.
– The accounts receivable ordinarily amounts to the product cost
for one month of production.
– For chemical plant , the working capital is 10 to 20 % of the
capital investment.
– The percentage is higher for seasonal products.

12
Factors affecting on investment
and production cost
• When cost for any type of commercial
process is to be determined ,
– It must be sufficiently accurate to provide reliable decision.
– Engineer must consider many factors that affects the cost.
– Many companies have reciprocal arrangement with other
concern
– where by certain raw material may be purchases at lower
prices than the prevailing market prices.
– This affect economics operation . If the prices are high
cost will be high.

13
 (1) Source of equipment
• The cost of equipment is one of the major cost involved in any
way chemical process
• In many cases standard types of tank reactors and others
equipment are used.
• A substantial reduction in cost can be made by using standard
equipment or purchasing second hand equipment .
• To purchase new equipment several independent quotation
should be obtained from different manufactures .
• A specification must be supplied to manufactures.
• It possible by minor changes can be made in design to match
with standard equipment .

14
 2) PRICE FLUCTUATION
• The prices may vary widely from one period to
another.
• This factor must be considered when the cost for an
industrial processes are determined.
• The engineer must keep up-to-date on price and
fluctuation.
• The wages vary from time to time.
• Hence considering price fluctuations , cost must be
determined.

15
 3) COMPANY POLICIES
• Company policies are different from one company to
other company.
• One company follow strictly safety regulations, so
cost will increase.
• Method used to determine the depreciation also
affects the cost
• Rate of overtime, dearness allowing etc. are also
important.
• All these items have direct effect on total cost to be
estimated.
16
 4) OPERATION TIME AND RATE
OF PRODUCTION
• When equipment isn't used for a long period of time,
labour cost is low ,
– But other cost like maintenance ,protection and depreciation are
continued.
– So this will increase the costs.
• Operating time , rate of production and sales demand
are closely related .
– The ideal plant must be operated under time schedule,
– Which will give the maximum production rate.
– When the production rate is maximum, the cost per unit product
decreases.
– Because fixed costs are utilized to their full extent.
– It's assumed that sales demands are sufficient.
17
 5) GOVERMENT POLICIES:
• Government policies are affect
investments.
1. Income tax rates are changing from time to
time.
2. Government subsides also decrease the
cost.
3. The exemption also reduces the cost.

18
 ESTIMATION OF CAPITAL
INVESTMENT
• Various items are included for estimation of
capital investment.
• The estimate may vary from pre-design
estimate to detailed estimate
 based on complete drawing and
specifications.
There are FIVE categories for such
estimations.

19
 ESTIMATION OF CAPITAL
INVESTMENT
• (1) Order of the magnitude estimate:
 Based on similar previous cost data.
 The accuracy is about and over +/- 30%.

• (2) Study estimate :

 Based on knowledge of major items of
equipment .
 The accuracy is probably up-to +/- 30 %.

20
 ESTIMATION OF CAPITAL
INVESTMENT
• (3) Preliminary estimate
 based on sufficient data to permit the
estimate to be budgeted.
The accuracy is within +/- 20%.

• (4) Definitive estimate :

 based on almost complete data but before
the completion of drawing and specification
 The accuracy is up to and about +/- 10%.
21
 ESTIMATION OF CAPITAL
INVESTMENT
• (5) Detailed estimate
 based on complete engineering drawing ,
specification , site surveys
The accuracy is within +/- 5%.

• The actual cost will be higher than estimated

cost if information is incomplete.

22
 ESTIMATION OF CAPITAL
INVESTMENT
 The first three methods are pre-design cost
estimation methods.
 These methods don't require that much detail.
 While remaining two methods require more
detailed information.
 First 3 methods are important for determining
estimate and based on the alternative designs
are compared
 These methods are used to provide basis for
requirement of capital.
 On these basis detailed estimates are determined.
23
 A grass root plant is defined as a complete plant
erected on new site.

 Battery limit - It's a geographical boundary

covering a specific project of existing plant.

 Fixed capital investment for new plant or for

addition to existing plant is determined by
above methods.

 For battery limit plant addition is considered

 but utilities , auxiliaries , storage ,
administrative buildings are not specified.
24
BRERAKDOWN OF FIXED CAPITAL
INVESTMENT
1) purchased equipment
• All equipment and spare parts
• Surplus equipment
• Freight charges
• Taxes, insurance
• Allowance for modification during startup

25
2) purchased equipment installation
– Installation of all listed equipment
– Structural support, insulation, calibration
3) instrumentation and control
– Purchase, installation, calibration
4) piping
– Process piping - carbon steel, aluminum, copper,
plastic, ceramic etc.
– Fitting and valves
– Insulation
5) Electrical equipment
– Electrical motors, switches, wire fitting, lighting
panels etc.
26
6) Building
• A) Process building -
– Structure, platform support, stave ways, ladder,
elevators, cranes etc
• B) Auxiliary building
– Administrative office, garage, warehouse,
– Guard and safety, fire station,
– Personal building research laboratory,
– Canteen, dispensary etc.
• C) Working building
– Carpentry, welding, electric, piping, instrument etc.
• D) Building services
– Heating, air conditioning, lighting, telephone,
intercommunication, painting etc. 27
7) Yard improvement
– Site development - leveling, roads, parking areas,
walkways, fences wall
8) Service facilities
– A) utilities - steam, power, water, refrigeration, compressed air,
fuel, waste disposal
– B) facilities - water treatment, cooling tower, water storage,
refrigeration plant, waste disposal plant
– C) non process equipment - office furniture and equipment,
canteen equipment, safety equipment, medical equipment,
laboratory equipment, loading and unloading station etc.
– D) Distribution and packaging-Raw material storage, product
storage, product packaging equipment etc.

9) Land -
– Survey and fees, property cost
28
 Indirect costs
• 1) Engineering supervision and inspection
– Engineering cost - administrative,
– Process, design, general engineering,
– Communication scale models, consultant fees etc.
• 2) Construction services
– Construction, operation,
– Maintenance of temporary services,
– Offices, roads, fencing,
– Communication etc.

29
 – Construction supervision,
– Accounting, time keeping,
– Purchasing, safety,
– Medical, field tests,
– Taxes, insurance, Internet
• 3) contractors fee
• 4) contingency

30
COST FACTORS IN CAPITAL
INVESTMENT

• To estimate the capital investment cost

factor is considered.
• It is the percentage of fixed capital
investment values of
• Direct and Indirect costs.

31
 Direct cost
Sr.No: COMPONENT RANGE
1 Purchased equipment 15-40
2 Purchased Equipment Installation 6-14
3 Instrumentation & controls (installed) 2-8
4 Insulation Cost 1-3
5 Piping (installed) 3-20
6 Electrical (installed) 2-10
7 Buildings (including services) 3-18
8 Yard Improvements 2-5
9 Service Facilities 8-20
10 Land 4-10

32
(1) Purchased Equipment
– The cost of purchased equipment is the basis of
several pre-design methods.
– Price, capacity, and auxiliary equipment for the
equipment is important for estimation.
• The equipments are divided into three
classes.
– (1) Processing equipment
– (2) Raw material handling and storage
equipment
– (3) Finished product handling and storage
equipment.
33
 Purchased Equipment

• The cost of auxiliary equipment, materials,

insulation, painting are also included.
• To get most accurate process equipment cost
one must obtain quotation from fabricators
and suppliers.
• From the past purchased equipment
experience the cost can be estimated.
• By referring various cost journals, price
can be obtained. 34
Estimation of Equipment cost by
Scaling
• It is often necessary to estimate the cost of
equipment,
– when no cost data are available for a particular size
of operational capacity involved.
• By using six-tenth factor rule cost can be
estimated
– For the equipment similar to one another capacity
for which cost data is available.

35
 Six-tenth factor rule

 Cost of equipment B is known

 Capacity of B is also known.

36
• The actual cost capacity factor varies with
capacity and type of equipment.
• When no information is available 0.6 factor is
used.
capacity factor
Dryer 10-100 ft2 0.76
crystallizer 500-700 ft3 0.37
heat exchanger 100-400 ft3 0.60
fixed Reactor 100-1000 gallon 0.56
glass lined 50-600 gallon 0.54

37
 Installation cost
• Installation of equipment involves cost for labor,
supports, platform, foundation, construction etc.
• The installation cost is estimated as percentage of
purchased equipment cost.

Equipment Installation cost

Heat exchanger 25-60%

Evaporator 30-60%

Compressor 20-60%

Filler 65-80%

Pump 25-60%

38
 Instrumentation and Control cost
• The cost of instrument, installation labor cost,
materials cost involved in instrumentation cost.
• The instrumentation cost depends on the
amount of control required.
• This cost is approximately 6-30% of the
purchased cost of all equipment.
• For solid fluid processing - 13%
• This cost is about 3% of the total capital
investment.
39
 Insulation cost
• When very high or low temperatures are
involved, insulation is to be done.
• So it is necessary to estimate insulation cost
• The total cost for the labor and material
required for insulation of equipment.
• In chemical plant is approximately 8 to 9
percent of purchased equipment cost.
• It is approximately 2% of total capital
investment.
40
 PIPING
• The cost of piping covers labour, fittings,
valves, supports etc.
• The complete erection of all piping used
directly in the process.
• Piping is used for the flow of
• Raw material, finished product,
• Steam, water, air, etc.

41
 PIPING
• The cost of piping is estimated 80% of
purchased equipment cost or 20% of fixed
capital investment.
• Labour cost for installation – 40-50% of total
installed cost of piping.
• The insulation cost is 15-25% of total installed
cost.

42
 ELECTRICAL INSTALLATION
• Cost for electrical installation consists of:
– Primarily installation labour
– Materials for power & lighting.
• The electrical installation consists of
– Power, wiring, lighting, transformation services
– Instrumentation and control wiring.
• In ordinary chemical plant, electrical installation
cost is 10-15% of the cost of all purchased
equipment and
• It is generally 3-10% of the fixed capital
investment.
43
 BUILDINGS
• The cost of buildings includes all expenses for
– Labour, material, plumbing, lighting, ventilation,
heating, etc.
• This cost is different for different plants.
• The cost is approximately 10% of purchased
equipment cost.

44
 YARDS IMPROVEMENTS
• The cost for fencing, compound wall, grading,
side walk, landscaping, etc
• It is 10-20%of purchased equipment cost or 2-
5% of fixed capital investment.

45
 SERVICE FACILITIES
• Utilities for supplying
– Steam, water, power, compressed air
– Fuel are part of service facilities of an industrial
plant.
• The total cost for services in chemical plant is
8-30% of the purchased equipment cost.
• For single product plant, the cost is low.
• The service cost is 8-20% of fixed capital
investment.
46
 LAND

• The cost of land depends upon the

location and hence variation is high.
• The cost roughly 4-25% of the purchased
equipment.
• It is generally 4-10% of the fixed capital
investment.

47
 Indirect cost
Sr.No: COMPONENT RANGE
1 Engineering and Supervision 4-21
2 Construction expense 4-16
3 Contractor’s fee 2-6
4 Contingency 5-15
5 Start up expenses 1-3

48
 ENGG. AND SUPERVISION

• The cost for construction, design, drafting,

travel, communication, office etc are
considered is indirect cost in fixed capital
investment.
• It is approximately 30% of the purchased
equipment cost.
• It is generally 4-21% of the fixed capital
investment.

49
 CONTRACTOR’S FEE

• This fee is 2-8% of the direct plant cost

• It is generally 4-10% of the fixed capital
investment.
• 2-6% of fixed capital investment.

50
 CONTINGENCIES
• Contingencies are unpredictable expenses
occurred during estimation and other
unforeseen expenses such expenses are,
price changes, small changes in design, errors
in design, etc.
• The contingencies expenses are 5-15% of the
direct and indirect plant costs.

51
 START UP EXPENSES

• After completion of plant construction, certain

changes have to be made before the plant
can operate as per design conditions.
• Such expenses are 1-3% of fixed capital
investment.

52
Break Even Chart for Process Industry

53
 COST INDEX
• Most of data available for immediate use
in a preliminary or predesigned estimate
are based on conditions at some time in
past.
• The prices may change with time due to
changes in economic conditions.
• So some methods must be used for
updating cost data applicable

54
 COST INDEX
• At a past date to costs that are
representative of conditions at a later time.
• This can be done by using cost index.
• A cost index is merely an index value for a
given point in time showing cost at that
time relative to a certain base time.
• If cost at some time in the past is known ,
the equivalent cost at the present time can
be determined by the formula given below.
55
 COST INDEX

• Cost indexes can be used to give general

estimate.
• Different types of indexes are:
• Marshall & Swift Equipment Cost Indexes
• Nelson Refinery Construction Cost Index
• Engineering News- Record Construction Index
• Chemical Engineering Plant Cost Index
56
 Marshall and
Swift equipment-cost index

57
58
 Estimating cost of equipment using
scaling factors and cost index.
• The purchased cost of a 50-gal glass-lined, jacketed
reactor (without drive) was$8350 in 1981.
• Estimate the purchased cost of a similar 3OO-gal, glass-
lined, jacketed reactor (without drive) in 1986.
• Use the annual average Marshall and Swift equipment-
cost index (all industry) to update the purchase cost of
the reactor.
• Solution. Marshall and Swift equipment-cost index (all
industry)
• (From Table 3) For 1981 721
• (From Table 3) For 1986 798
59
 METHODS FOR ESTIMATING
CAPITAL INVESTMENT
• Various methods can be used for estimating
capital investment.
• The choice of anyone method depends upon
the amount of detail information available and
the accuracy desired.
• There are six methods.
• The maximum accuracy within approximately
±5% of actual capital investment can be
obtained with detailed items estimate.
60
1. DETAILED ITEM ESTIMATE
• In this method, for each item, cost is
determined carefully.
• Complete drawing and specification of
equipments are prepared
• Cost is determined from current data and
quotations.
• Installation cost is evaluated from accurate
labour rates.

61
 DETAILED ITEM ESTIMATE
• Complete data for site survey and soil data
are obtained
– To minimize construction costs.
• This type of estimate requires large
amount of information.
• This method is used by contractors for
bidding.

62
 2. UNIT COST ESTIMATE
• In this method, accurate records of previous
cost experience is used to estimate fixed
capital investment.
• This method is used for preparing definitive
and preliminary estimate.
• The purchased price is obtained from quotation
or index-corrected cost records & published
data.

63
 UNIT COST ESTIMATE
• Equipment installation labour cost is evaluated
as % of delivered equipment cost.
• Cost for concrete, steel, pipe, electrical etc. are
determined on unit cost of material and
labours.
• The cost equation is given below:
• Cn[ ∑(E+Eₐ)+∑(fxMx+fyMₐ′)+∑feHe+∑fd*dn](f )

64
 3. PERCENTAGE OF DELIVERED-
EQUIPMENT COST

• In this method, delivered equipment cost is

required.
• Based on this cost, all other costs are
determined as percentage of delivered-
equipment cost.
• This method is used for preliminary study
estimate method.

65
 PERCENTAGE OF DELIVERED –
EQUIPMENT COST
• Purchased equipment cost = Rs. E
installation cost = 39% E
instrumentation cost = 28% E
piping(installed) = 10% E
electrical(installed) = 22% E
Building = 22% E
Service facilities = 55% E
Land = 6% E
Total =D Total direct cost

Engg. & Supervision = 32% E

Construction expenses = 34% E
Total =I indirect cost 66
 PERCENTAGE OF DELIVERED
EQUIPMENT COST
Total direct and indirect cost= D+I

Constructor’s fee = 5% (D+I)

Contingency = 10% (D+I)
Total= C
Fixed capital investment= D+I+C

67
 4) LANG FACTOR METHOD

• This method is used to estimate capital investment.

• This is order of magnitude estimate method.
• The cost of a process plant may be obtained by using
some factor.
• The cost of basic equipment is multiplied by some factor.
• These factors vary depending upon type of process plant
considered.
• The great accuracy can be achieved by using a number
factor means different factors are used for different type
of equipments.

68
 Example Factor
1.Fractionating 4.0
Column
2. Heat Exchanger 3.5
3. Compressor 2.5
4. Fired Heater 2.0

69
• Another approach is to use separate factor for:
 Erection of equipment, foundation, Utilities,
Piping etc.
 An Equation is developed,
Cn = fi [E(1+fF+fP+fm)+Ei+A]
E = Purchased Equipment Cost
fi = Indirect cost Factor always >1.0
fF = Cost Factor for field Labor
fp = Cost factor for pipelines
fm = Cost Factor for miscellaneous item
A = Increment cost for corrosion-resistance
Ei = Cost of equipment already installed at site.
70
 [5] POWER FACTOR APPLIED
TO PLANT CAPACITY RATIO
• This method is used for study estimate or order of
magnitude estimate.
• The fixed capital investment of a new process plant to
fixed Capital investment of similar previously constructed
plant is related
– By the equation given below,
x
– Cn = C ( )
– Cn = Fixed capital investment of new plant
– C = Fixed capital investment of old plant
– Cn = C {R}x =
– R = Capacity ratio of new to old plant
– X = 0.6 to 0.70 71

–
• If direct and indirect cost is considered then
equation is given below can used,
Cn = f [D(R)x + I]
f = Lumped cost index factor relative to
original installation cost
D = Direct Cost
I = Indirect Cost
D & I are costs of previously installed plant
of similar unit .
X = Tend to unity if capacity is increased by
adding identical process unit & not by
increasing capacity of the process
equipment.
72
 PLANT X
Nitric Acid 0.6
Sulfuric Acid 0.65
Polymerization 0.58
Chorine(Electrolysis 0.45
of NaCl)
Ammonia Steam 0.53
Reforming

73
 6) Turn over ratio
• This is order of magnitude estimate method
• Turn over ratio =
 (Gross annual sale /fixed capital investment)
• The reciprocal of turn over ratio is defined as
 Capital ratio or investment ratio
• Turn over ratio 5.0 is very common.
 As a very rough rule of thumb the ratio can be
approximately as 1.0 or unity.

74
 Total Production Cost
• Methods for estimating capital investment
is one of complete cost estimate.
• Another important part is the estimation of
costs for operating plant and selling price
of products.
• These costs are considered as total
production cost.

75
 Total
Production
Cost

Manufacturing General
cost Expenses

Direct Plant Distributive

Administrative
Production Fixed Charges Overhead and marketing
costs
cost Cost costs

76
 Total Production Cost
• Total product cost are commonly calculated on
one of the three basis:
1) Daily basis
2) Unit of product basis
3) Annual basis

• The best of them is the annual basis because:

1) Effect of seasonal variation is eliminated.
2) It provides operating cost at lesser than full
capacity.

77
 A) Manufacturing Cost
• All expenses directly connected with the
– Manufacturing operation or physical equipment of a
process plant
• These expenses are divided into three classes :
1) Direct production cost
2) Fixed costs
3) Plant overhead cost

78
 1) Direct Production Cost
• The expenses are directly related with manufacturing
operation. The items considered are as follows:
 1) Raw Material:
• The one of the major costs is raw material cost.
• The quantity of raw material to be supplied per unit time
or per unit product can be determined from process
material balances.
• The cost of raw materials can be estimated from
quotations supplied by traders/ manufacturers.
• The market price are often used for estimating raw
material cost.
• In chemical plants, raw-material costs are usually in the
range of 10 to 50 percent of the total product cost.
79
 2)Direct operating labor:

• The operating labor is divided into 2 groups:

a) Skilled labor b) Unskilled labor
• Wages for operating labor are different at different
locations.
• The requirement of labor can be estimated
• From company experience of similar process plant.
• From the knowledge of the flow sheet and drawing
operating labor can be estimated.
Direct supervisory & electrical labor
1.) Utilities
2.)Maintain and Repair
3.)Laboratory Chargers
4.)Patents/Royalties
5.)Catalyst/ Solvent

80
3) Utilities:
• The cost for utilities:
• such as steam, electricity, process and cooling water,
compressed air, natural gas, and fuel oil,
• varies widely depending on the amount of consumption,
plant location, and source.
• Water is required for :
• cooling, cleaning & washing purpose.
• It may be used in form of steam as R/M.
• Electricity is used for :
• lighting, motor and to run electrical equipment.
• Compressed air is used :
• To develop the pressure.
• Air is used for combustion of fuel :
• To generate heat requirement.
• Utility cost for ordinary chemical process is :
• About 10-20 percent of total production cost.

81
4) Maintenance and Repair
• To run all the equipment with possible higher efficiency
or performance maintenance is essential.
• By maintenance plant is kept in efficient condition.
• Sometimes repair is also required spare parts is
replaced if necessary.
• Maintenance & repair cost includes labour material
and supervision.
• This is approximately 2% of equipment cost & 6% of
fixed capital investment.
• Building repair cost is 3%-4% of building cost

82
 5) Operating supplies:-
– In any manufacturing operation many miscellaneous supplies
are needed to keep the function of plant efficient.
– Such items are charts, lubricants, testing chemical, etc..
– The annual cost for such supplies about 15% of the total cost
for maintenance and repair.
laboratory charges:
– The cost of laboratory equipment , chemical , labor ,
supervision, etc.. Is about 10% -20% of operating labor cost.
Patent and royallies :
– For many process patents are to be purchased and royally is
to be paid.
– Such cost is 6% of total product cost.
Catalyst and solvent :
• The cost of catalyst and solvent depend on type of process
83
 2) Fixed charges
• Certain expenses are always present in industrial
plant whether or not manufacturing processes is in
operation
• The costs that are invariant with the amount of
production are designated as fixed costs or fixed
charges
• The include costs for depreciation, local property
taxes, insurance, rent etc.
• The expenses of this type are a rough
approximation, these charges are 10% to 20% of
the total product costs

84
• 1)Depreciation :
– Equipment, building and other material objects comprising
a manufacturing plant are require an initial investment
– Which must be written off as a manufacturing expenses
– In order to write off this cost, a decrease in value is
assumed to occur throughout the usual life
– This is decrease in value is designated as depreciation
– Thus depreciation is calculated by various method.
– For every year during the life period of equipment
– The annual depreciation rate for machinery and equipment
is about 10%, of the total fixed capital equipment.

85
• 2) Local Taxes :
– The rate of local taxes depends upon the
locality of the plant and local region laws
– Annual properties taxes are higher in
populated areas and are 2% to 4% of the
fixed capital investment
– For less populated area taxes are 1% to 2%
of the fixed capital investment

86
• 3) Insurance :
– Insurance rate depend upon type of process
used for manufacturing operation
– Insurance on annual basis is about 1% of the
fixed capital investment
• 4) Rent:
– Annual cost for rented land and building is
approximately 8% to 12% of the value of
rented properties.

87
 3) PLANT OVER HEAD COST
• Many other expenses are involved which are not
directly related with production operation
– To run the plant efficiently such expense are
occurred.
– These expenses are called plant over head
cost.
– Non manufacturing machinery, equipment &
buildings are such expense.

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• The following items are considered for plant
overhead cost
– Hospital & Medical Service
– Safety Service
– Canteen Facilities
– Control laboratories
– Packaging
– Employment offices
– Distribution of utilities
– Inter plant transformation
– Lighting

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 B) General Expenses
1. ADMINISTRATIVE COST
The expense connected with top
management cannot be charged directly to
manufacturing cost.
 Salaries of administrative secretors,
accountant officer communication building.
 This costs 20% to 50% operating cost.

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 B) General Expenses
2. Distribution and marketing Cost:
• It is necessary to sell the product to push the product in
the market
• Distribution network is necessary for this purpose
– Salesman, advertisement, technical services after sale
– All such expenses are to be bared.
– This cost is 2%- 20% of the total product cost.
• Research and development cost
– R&D is necessary to improve the quality of product
– Salaries, laboratory equipment etc expanses are 2%
to 5%.
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