CEE L19 Slides

Chapter 3

COST ESTIMATION Factors

Affecting Investment & Production

Costs: 

Need of accurate cost estimation



Clear understanding of factors affecting cost



E.g. market price and actual price to be paid by company for raw material are different---engineer should be aware of this

1. Sources of Equipments 

Equipments---one Equipments---one of the major cost



Consider using standard types of equipment; second hand equipment; idle equipments



Number of quotations to be asked from different manufacturers for single equipment



To provide detail specification of equipments to manufacturers

2. Price Fluctuations 

Prices vary from period to period 1

Compiled by Prof. Prasad Parulekar

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

Wage rates for operators and supervisors supervisors changes after a certain time



Equipment purchase cost varies



Monthly published labor reviews, industrial journals indicating

prices of equipments, equipments,

materials, chemicals, etc., cost indices should be referred 3. Company Policies 

Costs affected directly by individual company policies e.g. strict regulations which must be met



Methods

for

determining

accounting

procedures,

vary

depreciation, company

to

company 

Company policies w.r.t. labor unions (affects on fixing of overtime charges, type of work to be allotted

4. Operating Time and Rate of production









Idle

equipments----no

labor

cost;

but

maintenance, protection and depreciation charges continue 

Operating time – production rate – sales demand---closely interrelated



— operating Ideal plant — operating as per time schedule,

fiving maximum production rate, maintaining economic operating methods (assumption---total sales demand enough to consume all produced material) 

Total cost per unit production---should production---should be minimum



If plant production capacity > sales demand, then---carry the operation at reduced capacity or periodically at full capacity

5. Governmental Policies 

Industrial costs---affected by governments rules, regulation and restrictions







e.g. import-export tariffs regulation; income tax rules; capital gain tax rules; environmental regulations, etc. 

Equipment sold before its useful time period over; offer time may be more than its asset value at that time---profit over this asset value is taxable as

long

term

capital

gain---depends

on

government government rules and laws at that time 

Company has its own methods to follow these regulations



Close observation over changing government policies and company economic situation is needed

 Capital Investments: Investments:

Total Capital Investment Investment (TCI): sufficient amount of money to be supplied before the plant is put in operation (for equipments, piping, land, controls,







1. Fixed Capital Investment (FCI): Manufacturing FCI: capital needed for complete

process operation e.g. equipments, auxiliaries, piping, instruments, instruments, insulation, foundations, site preparation Non-Manufacturing FCI: expenses for construction

overhead, components not directly related to process operation e.g. land, process buildings, administrative, other offices, warehouses, laboratories, transportation, shipping, utilities, waste disposal facility, shops, etc. Construction overhead costs---

expenses for field

offices, supervision, home office expenses, engineering expenses, miscellaneous construction costs, contractor’s

fees, contingencies contingencies 2. Working Capital Investment (WCI):

Investments for ---

Raw material, finished & semifinished products in stock



Accounts receivable receivable











Accounts payable, payable, Taxes payable payable Raw material inventory in WC---amounts to 1 month supply; similarly for finished product



1 month limit---reason---credit terms extended to customers based on 30 days payment period



Ratio of WCI to TCI varies company to company; generally--- 10 to 20% of TCI; may go up to 50% for

companies

producing

seasonal

products

(because of inventory cost)

 Estimation of Capital Investment: 

Possibility of missing any item to be considered during estimation--- will create estimation error



To avoid this, typical check list of items to be considered should be available

Break-down of FCI items (typical checklist):  Direct Costs









 Spare

parts & non installed equipments

spares  Surplus

equipments, supplies, equipment

allowances  Inflation cost allowances  Freight charges  Taxes,

insurance, insurance, duties

 Allowances for

modification modification during start start up

2. Purchased equipment installation  Installation

of all equipments listed in flow-

sheet  Structural supports, insulation, paint

3. Instrumentation and Controls  Purchase,

installation, calibration, computer







Insulation---piping,  Insulation---piping,

equipment equipment

5. Electrical equipments and Materials  Electrical

equipments---switches,

motors,

wires, fittings, feeders, feeders, grounding, instrument instrument and control wiring, lighting, panels  Electrical materials and labor

6. Buildings (including services)  Process

buildings---

superstructures,

substructures,

platforms,

supports,

stairways, ladders, access ways, cranes, monorails, elevators, hoists etc.  Auxiliary

buildings---

administration administration

&







 Maintenance

metals,

shops — electric, electric, piping, sheet

machines,

welding,

carpentry,

instrument  Building

services---

plumbing,

heating,

ventilation, dust collection, air conditioning, conditioning, building

lighting,

telephones,

elevators,

interplant

escalators,

communication

system, painting, sprinkler system, fire alarm

7. Yard Improvements Improvements  Site

— site development — site clearing, grading,

roads, walkways, railroads, fences, parking areas, landscaping 8. Service facilities







waste disposal plant, environmental environmental controls, fire protection  Non-process

equipments--- office furniture;

equipments for --- cafeteria, safety and medical, shop e, automotive, yard material handling, laboratory, locker room, garage, shelves,

bins,

pellets,

hand

trucks,

housekeeping, housekeeping, fire extinguishers, extinguishers, fire engines, loading stations  Distribution & packaging--- equipments for--

raw material & product storage and handling, product packaging; blending facilities; 9. Land  Survey

and fees







communication, scale models, consultant fees, travel  Inspection

2. Construction Expenses  Construction,

operation and maintenance of

temporary facilities, offices, roads, parking lots, railroads,

electrical,

piping,

communication,

fencing  Construction tools and  Construction

equipment equipment

supervision,

accounting,

timekeeping, purchasing  Ware

house personnel personnel and and expenses, guards guards

 Safety, medical, fringe benefits  Permits, field tests, special licences









CEE L19 Slides

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