Cost

Estimation
and Indirect
Costs
Diah Agustina P, ST.,MT
Chemical Engineering
University of Brawijaya
Cash flow for industrial operations
Factor affecting investment and production cost
Source of equipment : If new equipment must be
bought, several independent quotations should
be obtained from different manufacturers. When
the specifications are given to the manufacturers,
the chances for a low cost estimate are
increased if the engineer does not place overly
strict limitations on the design.
Price fluctuations: prices may vary widely from
one period to another, and this factor must be
considered when the costs for an industrial
process are determined.
Company policy : Policies of individual
companies have a direct effect on costs
Factor affecting investment and production cost
Operating time and rate production:
The ideal plant should operate under a time
schedule which gives the maximum production rate
while maintaining economic operating methods.
If the production capacity of the process is greater
than the sales demand, the operation can be
carried on at reduced capacity or periodically at full
capacity.

Factor affecting investment and production cost
Break-even chart for chemical processing plant
Govermental policy:
The national government has many regulations and
restrictions which have a direct effect on industrial
costs.
Some examples of these are import and export tariff
regulations, restrictions on permissible depreciation
rates, income-tax rules, and environmental
regulations.

Factor affecting investment and production cost
Capital Investment
Fixed capital
investment (FCI)
Manufacturing capital
investment
Non manufacturing
capital investment
Equipment
Piping
Instrument
Insulation
Foundation, etc
Land
Processing building
Administrative and other
office
Laboartories, etc


Working capital investment
Raw
material
Monthly
payment
Taxes
payable
Account
payable
Capital Investment
Fixed capital
Investment
(FCI)
Working capital
investment
(WCI)
Total capital investment (TCI) = WCI + FCI
Direct and Indirect Cost Estimates
2012 by McGraw-Hill All Rights Reserved
15-3
Direct cost examples
Physical assets
Maintenance and
operating costs (M&O)
Materials
Direct human labor (costs
and benefits)
Scrapped and reworked
product
Direct supervision of
personnel


Indirect cost
examples
Utilities
IT systems and networks
Purchasing
Management
Taxes
Legal functions
Warranty and guarantees
Quality assurance
Accounting functions
Marketing and publicity

Estimation of capital investment
Cost Indexes
2012 by McGraw-Hill All Rights Reserved
15-8
Definition: Cost Index is ratio of cost today to cost in
the past
Indicates change in cost over time; therefore, they
account for the impact of inflation
Index is dimensionless
CPI (Consumer Price Index) is a good example
Formula for total
cost is



Cost Indexes as annual average
The most common cost index
Marshall and swift equipment cost
indexes
Engineering news record construction
cost indexes
Nelson-farrar construction cost index
Chemical engineering plant cost index

Finding Cost Indexes
2012 by McGraw-Hill All Rights Reserved
15-10





Cost indexes are maintained in areas such as construction,
chemical and mechanical industries
Updated monthly and annually; many include regionalized
and international project indexes.
Indexes in these areas are often subdivided into smaller
components and can be used in preliminary, as well as
detailed design stages

Examples are:
Chemical Engineering Plant Cost Index (CEPCI)
www.che.com/pci
McGraw-Hill Construction Index
www.construction.com
US Department of Labor, Bureau of Labor Statistics
www.bls.gov
Example: Cost Index Method
2012 by McGraw-Hill All Rights Reserved
15-9
Estimate the total cost of labor today in US dollars for a
maritime construction project using data from a similar
project in Europe completed in 1998.

Labor index, 1998: 789.6 Cost in 1998: 3.9 million
Labor index, current: 1165.8 Currently, 1 = 1.5 US$

Year Cost index
1999 390.6
2000 394.1
2001 394.3
2002 390.4
2003 401.7
2004 444.2
2005 468.2
2006 499.5
2007 525.4
2008 575.4
2009
Estimate the purchased
cost of 100 gal reactor in
2009. Use the annual
average Marshall and swift
equipment cost index.
Cost in 2008 : $ 4.3 million
y = 20.51x - 40644
0
100
200
300
400
500
600
700
1998 2000 2002 2004 2006 2008 2010
C
o
s
t

i
n
d
e
x


Year
CHEMICAL ENGINEERING PLANT COST
INDEX (CEPCI)
Cost factor in capital investment
Capital investment, as
defined earlier, is the total
amount of money needed
to supply the necessary
plant and manufacturing
facilities plus the amount
of money required as
working capital for
operation of the facilities.
Purchased equipment
Sources of equipment prices, methods of adjusting
equipment prices for capacity, and methods of
estimating auxiliary process equipment.
The various types of equipment can often be divided
conveniently into (1) processing equipment, (2) raw-
materials handling and storage equipment, and (3)
finished-products handling and storage equipment.
Cost-Estimating Relationships (CER)
2012 by McGraw-Hill All Rights Reserved
15-11





CER equations are used in early design stages to
estimate plant, equipment and construction costs
CERs are generically different from index relations,
because they estimate based on design variables
(weight, thrust, force, pressure, speed, etc.)

Commonly used CERs

Cost-capacity equation (relates cost to
capacity)


Cost-Capacity Equation
2012 by McGraw-Hill All Rights Reserved
15-12

Also called Estimation Equipment Cost by Scalling






Exponent defines relation between capacities








Typical exponent for equipment cost Vs capacity
Typical exponent for equipment cost Vs capacity
Example
A 100 hp air compressor costs $3000 five years ago
when the cost index was 130. Estimate the cost of a
300 hp compressor today when the cost index is 255.
The exponent for air compressor is 0.9.
Purchased equipment installation
The installation of equipment
involves costs for labor,
foundations, supports, platforms,
construction expenses, and other
factors directly related to the
erection of purchased equipment.
Installation costs for equipment,
therefore, are estimated to vary from
25 to 55 percent of the purchased-
equipment cost.
Insulation cost
The total cost for the labor and materials required for insulating
equipment and piping in ordinary chemical plants is approximately 8 to
9 percent of the purchased-equipment cost.
Instrumentation and control
Total instrumentation cost depends on the amount of
control required and may amount to 6 to 30 percent of
the purchased cost for all equipment.
the normal solid-fluid chemical processing plant, a value
of 13 percent of the purchased equipment is normally
used to estimate the total instrumentation cost.

Piping
Electrical installation
The cost for electrical installations consists primarily of
installation labor and materials for power and lighting,
with building-service lighting usually included under the
heading of building-and-services costs.
electrical-installations cost amounts to 10 to 15 percent
of the value of all purchased equipment.
Building
The cost for buildings including services consists of
expenses for labor, materials, and supplies involved in
the erection of all buildings connected with the plant.
Yard improvment
Costs for fencing, grading, roads, sidewalks, railroad
sidings, landscaping, and similar items constitute the
portion of the capital investment included in yard
improvements.
Yard-improvements cost for chemical plants
approximates 10 to 20 percent of the purchased-
equipment cost
Service facilities
steam, water, power, compressed air, and fuel, waste
disposal, fire protection, and miscellaneous service
items, such as shop, first aid, and cafeteria equipment
and facilities, require capital investments which are
included under the general heading of service-facilities
cost.
The total cost for service facilities in chemical plants
generally ranges from 30 to 80 percent of the
purchased-equipment
Land
land costs for industrial plants amount to 4 to 8 percent of
the purchased-equipment
Engineering and supervision
The costs for construction design and engineering, drafting,
purchasing, accounting, construction and cost engineering,
travel, reproductions, communications, and home office
expense including overhead constitute the capital investment
for engineering and supervision
The cost is 30 percent of the purchased equipment
Contruction expense
Another expense which is included under indirect plant
cost is the item of construction or field expense and
includes temporary construction and operation,
construction tools and rentals, home office personnel
located at the construction site, construction payroll,
travel and living, taxes and insurance, and other
construction overhead.

Contractors fee
2 to 8 percent of direct plant cost
Its varies for different situation

Contingencies
A contingency factor is usually included in an
estimate of capital investment to compensate for
unpredictable events (storm, floods, strikes etc)
Its ranging from 5 to 15 percent of the direct and
indirect plant cos
Ratio factor estimating capital invesment
Example
Prepare a study estimate of the FCI and TCI for the
process plant (solid-fluid) if the delivered-equipment
cost is $800,000.
Estimation of total production cost
1
Manufacturing cost
Operating cost
Production cost
2
General expense
Manufacturing cost
Direct production cost
Fixed charged
Plant over head cost
Direct production cost
Raw materials (including transportation, unloading,
etc.,)
Direct operating labor
Plant maintenance and repairs
Operating supplies
Laboratories charges Power
Utilities
Patent and royalties
Catalysts.
Fixed charged


Fixed charges are expenses which remain practically
constant from year to year and do not vary widely with
changes in production rate.
Depreciation : 10 % of the FCI
Local taxes : 2 % of FCI
Insurance : 1 % of FCI



Plant over head


Costs are for hospital and medical services; general plant
maintenance and overhead; safety services; payroll
overhead including pensions, vacation allowances, social
security, and life insurance; packaging, restaurant and
recreation facilities, salvage services, control laboratories,
property protection, plant superintendence, warehouse
and storage facilities, and special employee benefits.


General expense
Administrative
expense
Distributing
and
marketing
Research
and
development
Gross
earning
expense
Administrative expenses
executive and clerical wages
office supplies
engineering and legal expenses
upkeep on office buildings
general communications
Distribution and marketing expenses
costs incurred in the process of selling and distributing
the various products :
Expenditures for materials handling
Containers
Shipping
sales offices
Salesmen
Technical sales service, and advertising
Research and development expenses
These costs are for salaries
Wages
Special equipment
Research facilities and consultant fees related to
developing new ideas or improved processes.
Financing expenses include the extra costs involved in
procuring the money necessary for the capital
investment. Financing expense is usually limited to
interest on borrowed money, and this expense is
sometimes listed as a fixed charge.
Direct production cost
Raw Material :
Material balance
Chemical marketing reporter
Freight or transportation charges should be included
in the raw-material costs, and these charges should
be based on the form in which the raw materials are
to be purchased for use in the final plant.

Operating Labor :
Operating labor may be divided into skilled and
unskilled labor.
Bureau of Labor Monthly Labor Review.
If a flow sheet and drawings of the process are
available, the operating labor may be estimated from
an analysis of the work to be done.
Another method of estimating labor requirements as
a function of plant capacity is based on adding up the
various principal processing steps
Direct Supervisory and Clerical Labor :
The cost for direct supervisory and clerical labor
averages about 15 percent of the cost for operating
labor.
A certain amount of direct supervisory and clerical
labor is always required for a manufacturing
operation

Utilities :
Electrical power must be supplied for lighting,
motors, and various process equipment demands.
Maintenance and Repairs :
In the process industries, the total plant cost per
year for maintenance and repairs is roughly equal to
an average of 6 percent of the fixed-capital
investment
Operating Supplies :
In any manufacturing operation, many miscellaneous
supplies are needed to keep the process functioning
efficiently.
The annual cost for this type of supplies is about 15
percent of the total cost for maintenance and repairs.
Laboratory Charges :
The cost of laboratory tests for control of operations
and for product-quality control is covered in this
manufacturing cost.
10 to 20 percent of the operating labor
Patents and Royalties :
Many manufacturing processes are covered by
patents.
6 percent of the total product cost
Catalysts and Solvents :
Costs for catalysts and solvents can be significant and
depend upon the specific manufacturing processes
chosen
Fixed charged
These include costs for :
Depreciation
Local property taxes
Insurance
rent.
10 to 20 percent of the total product cost


Depreciation :
Machinery and equipment : 10 percent of the fixed
capital investment
Buildings : 3 percent of the initial cost.
Local taxes:
in highly populated : 2 to 4 percent of the fixed-capital
investment.
In less populated areas : 1 to 2 percent of the fixed
capital investment.

Insurance :
o Its depend on the type of process being carried out in
the manufacturing operation and on the extent of
available protection facilities.
o 1 percent of the fixed-capital investment.
Rent :
Annual costs for rented land and buildings amount to
about 8 to 12 percent of the value of the rented
property
Plant overhead cost
50 to 70 percent of the total expense for operating
labor, supervision, and maintenance.
Hospital and medical service
General engineering
Safety service
Cafetaria and recreation facilities
General plant maintenance
Shop
Interpalnt communications and transportation
Administrative cost
Salaries and wages for :
Administrators
Secretaries
Accountants
Stenographers
Typists, and similar workers are part of the
administrative expenses.
Distribution and Marketing Cost
salaries, wages, supplies, and other expenses for sales
offices; salaries, commissions, and traveling expenses for
salesmen; shipping expenses; cost of containers;
advertising expenses; and technical sales service.
The cost for chemical plants are in the range of 2 to 20
percent of the total product cost
Research and Development
Research and development costs include salaries
and wages for all personnel directly connected with this
type of work, fixed and operating expenses for all
machinery and equipment involved, costs for materials
and supplies, direct overhead expenses, and
miscellaneous costs.
The cost amount to about 2 to 5 percent of every
sales dollar.
ANALISIS PROFITABILITAS TRADITIONAL
Indeks
profitabilitas
Rate of return,
Payback
period, BEP

Rate of return on investment (ROI)
Profit tahunan yang dihasilkan oleh satu unit kapital
yang diinvestasikan,


Kapital yang diinvestasikan: original total capital
investment, fixed-capital, depreciated investment,
average investment, dll;
Disebut juga engineers method, du Pont method,
capitalized earning rate.
Sebagai pembanding (investasi pabrik atau disimpan??).
ROI setelah pajak = 15-20%
ROI sebelum pajak = 30-40%.
Digunakan untuk menilai proyek kecil.

PAYBACK PERIOD
Waktu minimum untuk merekoveri investasi kapital
awal
Berdasarkan profit rata-rata dan depresiasi rata-rata;
Profit rata-rata = income - operating cost (tidak
termasuk depresiasi)
Investasi kapital awal = biaya kapital tetap awal yang
mengalami depresiasi;
Disebut juga payback time, payout period, payoff
period, cash recovery period dan years to pay out.

Minimum pay out priod (POP)




Payback period < 5 tahun
Break event point (BEP)
Hasil penjualan = ongkos yang dikeluarkan
Ongkos terdiri dari :
Pengeluaran tetap (fixed cost)
Biaya variabel (V) :
Bahan baku
Packing
Utilitas
Royaliti
shipping

Biaya semi variabel (SV):
Biaya umum
Opertaing suplies
Biaya overhead pabrik
Dapat ditentukan dengan grafik

BEP Chart
Example 1
Sebuah pabrik didirikan dengan FCI Rp. 220,000,000
dimana setiap tahun dapat menghasilkan 9,000,000 lb
produk. Informasi biaya produksi sebagai berikut :
Bahan baku : Rp. 16,- / lb produk
Utilitas :
Steam : 50 lb/lb produk dengan harga Rp. 50/1000 lb
Listrik : kwh/lb produk dengan harga Rp. 1,50/kwh
Air : 10 gallon/lb produk dengan harga Rp 15/1000
gallon
Hasil produksi dijual dalam kantong @ 50 lb seharga Rp.
70/lb. Pabrik beroperasi secara kontinyu 350 hari dalam 1
tahun dan 24 jam/hari. Didalam 1 group bekerja 30 orang
buruh pabrik dengan upah rata-rata Rp. 100/jam kerja.
Besar pajak penghasilan pabrik adalah 48 %.
Hitunglah :
a. Rate dalam keadaan break even point
b. ROI & POP
c. Pada kapasitas produksi berapakah tiik BEP tercapai?
INDEKS PROFITABILITAS MODERN
Menggunakan cash flow di seluruh lifecycle proyek;
Net present value (NPV)
Discounted cash flow rate of return (DCFRR)
NET PRESENT VALUE
Untuk menilai profitabilitas jangka panjang;
Merupakan profit sesungguhnya setiap tahun;
Cash flow CF
n
yang diterima di tahun n dibawa ke present
value CF
n,o
:


Cumulative cash flow dalam net present value (NPV):

NET PRESENT VALUE
Analisis net present value
Objektif: memaksimalkan NPV,
Merekoveri initial investment,
Menghasilkan nilai tambah setelah break-even point,
Tergantung pada asumsi suku bunga.
Proyek profitable:
NPV positif dengan suku bunga cukup tinggi (misal
10%);
Proyek terbaik: NPV paling tinggi
Evolusi NPV dapat mengusulkan proyek retrofit atau
penghentian proyek.

DISCOUNTED CASH FLOW RATE OF RETURN (DCFRR)
Perhitungan NPV pada berbagai suku bunga
memungkinkan diperolehnya suku bunga dimana net
present value akumulatif di akhir proyek bernilai nol
DCFRR: ukuran suku bunga maksimum yang dibayar
sebuah proyek dan masih break even di akhir umur
proyek;
Disebut pula internal rate of return (IRR), investors
return on investment, profitability index, interest rate
of return, atau discounted cashflow.

DISCOUNTED CASH FLOW RATE OF RETURN (DCFRR)
DCFRR dihitung sebagai suku bunga dimana net present
value di akhir proyek menjadi nol:



i = DCFRR
Menggunakan nilai setelah pajak yang dikoreksi dengan
inflasi;
Untuk membandingkan kinerja kapital berbagai proyek;
Ukuran profitabilitas maksimum;
Proyek dengan DCFRR terbesar paling disukai.

Pajak
Worksheet for calculating present value
Tahu
n ke
Kapasitas INVESTASI
Produksi Modal Sendiri Modal Pinjaman Investasi Total
(4) + (6)
Jumlah Akumulasi Jumlah Akumulasi
(1) (2) (3) (4) (5) (6) (7)
-2
-1
0
1 60%





2 80%
3 100%
4 100%
5 100%
6 100%
7 100%
8 100%
9 100%
10 100%
Pengembalian Sisa Hasil PRODUCTION COST (Rp)
Pinjaman Pinjaman Penjualan Biaya Operasi Depresiasi Bunga dari
(9) - (8) sisa pinjaman
(8) (9) (10) (11) (12) (13)














LABA (Rp) Actual Net Cumulative
Sebelum Pajak Pajak Sesudah Pajak Cash Flow (Rp) Cash Flow (Rp)
Net Cash Flow
(Rp)
(10)-(11)-(12)-
(13) (14)-(15) (16)+(12) (17)-(8)
(14) (15) (16) (17) (18) (19)











Pay out time (POT)
Tahun Net Cash Flow Cummulative Cash Flow
1
2
3
Data
TCI

4
5
6
7
8
9
10
POT dapat terlihat pada tahun ke n
BEP
Example 2
Berdasarkan data example 1 lakukan analisa ekonomi
menggunakan metode discounted cash flow dengan
informasi berikut :
a. Modal 60 % milik sendiri dan 40 % pinjaman bank
b. Bunga pinjaman bank 17 %
c. Pengembalian pinjaman selama 10 tahun sebesar
10%/tahun
d. Pembayaran modal selama masa konstruksi dilakukan
secara diskrit yaitu sebesar 50%.
e. Pajak penghasilan mengikuti aturan pemerintah
f. Umur pabrik 10 tahun

g. Kapasitas produksi :
- Tahun ke-1 = 60%
- Tahun ke-2 = 80 %
- Tahun ke-3 = 100%