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
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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
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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
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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,
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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
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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
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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
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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
&
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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
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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
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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
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