of 22
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Estimate Cost
how much does
it cost to make
a box of
matches?
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Match and Box
335 KClOP2 +
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
KClOP35
52 +
+ 1.7 MJ mol-1
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The Process
cut
mix
wax
dip
dry
mix
fold
packglue
woodP
binder
grit
card-
board
KClO3binder
grit
box with matches
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Costs
woodP binder grit cardboardKClO3materials
utilities steam, water, electricity
equipment
BOM: bill of materials
to mix, print, fold, cut, the building
operators to run the equipment
administration personnel, finances, sales
engineering to develop
management to supervise
hired-in installation, maintenance, transport, marketing
marketing to market, sell
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The Many Costs
huge number of transactions
easy to get lost
even worse with multiple products
several ways of grouping coststo retain overview
requires
admini-
stration
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Cost Grouping 1
direct cost
three
groups:
depreciation
indirect cost
for one product
for all products
for wear and age
every division is a bit arbitrary
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Direct Cost
costs easily assigned to one product
ingredients (for matter)
parts (for devices)
process energy
direct labour
dedicated equipment
marketing and sales
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Indirect Cost (Overhead)
costs divided over many productsmanagement
administration
shared equipment
maintenance
shared utilities
costs divided via 'cost drivers':
use of raw materials
use of labour
total sales
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Depreciation
buildings
assets for production or services
plant
computers
equipment
investment in product
development
these gradually
lose value(wear, ageing)
taken into account as a depreciation cost
often a fixed percentage per year (till 'write-off')
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Cost Grouping 2
total cost versus production
for a given plantcost of all operations
fixed costtwo groups: independent of production
variable cost
proportional to production
every division is a bit arbitrary
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Fixed Cost
fixed cost
FC
units sold US
dedicated equipment
(depreciation, maintenance)
'fixed' personnel
'fixed' contracts
(total)
cost
TC product development
(depreciation)
overhead on personnel
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Variable Cost
units sold US
materials, parts
energy
hired personnel
variable cost
VC variable cost per unitVU
VC = VU US
(total)
cost
TC
most 'overhead'
marketing, sales
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(Total) Cost
(total)
cost
TC
FC
units sold US
VC
TC = FC + VC
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Sales and Price
sales
S
units sold US
price = constant
price(per unit)
PU
S = PU US
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Cost Sales Profit
assumes
stable conditions
steady state
firm has
(single product)
linear cost-sales
CSP Analysis
no inventory
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Factory Parameters
fixed costs variable costs
price of equipment
maintenance
depreciation
price of development
fixed personnel
transport
overhead personnel
price of wood10M 1 kg-1
price of chlorate5% yr-1 1 kg-1
price of phosphorous5% yr-1 100 kg-1
price of cardboard0M 1 kg-1
price of binder50k yr-1 1 kg-1
price of energy
200k yr-1
30 GJ-1
hired personnel
25 % yr-1 0.001 unit-1marketing, sales
overhead materials 25% yr -1
none
30 people
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Cost
personnel
equipmentmaintenance
depreciation
30
20
10
0
wood
phosphorouscardboard
sales
overhead
M / yrcost
0 200 400 600millions / yr
units sold
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Sales30
20
10
0
M / yrsales
0 200 400 600
sales price shop price
value added tax 20%
gross margin super-
market 40%
gross margin trade
30%
price per unit0.092
millions / yr
units sold
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Break-
evenPoint
30
20
10
0
RM / yr
sales
0 200 400 600
profit before tax
corporate tax
30%
cost
millions / yr
units sold
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Economy of Scale1.0
0.5
0
0 200 400 600
millions / yr
units sold
price per unit RM
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Finding Cost (1)
working back from prices
experience in the firm
external data, quotations
very uncertain
if your firm knows
often incomplete
expect to spend time on
getting costs in a new field
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Summary
a firm has large numbersof costs and revenues
costs grouped in two ways:
direct indirect depreciation
fixed variable
to keep overview of firm
to understand your product
cost estimation difficult for beginner
revenue estimation difficult for
everybody
