Basic Of Costing (Products & Services Direct & Indirect)

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Data Driven, Transparent, Cost Models

Basic Of Costing (Products & Services – Direct & Indirect)

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Content

• Goals

• Basics of Cost

• Understanding Cost of Product & Services (Direct & Indirect)

• Basic of Cost Calculations of Product & Services (Direct &

Indirect)

• Basic of Cost Visibility for Better Cost Management of Product &

Services (Direct & Indirect)

Goals

• Have clarity on basics of costing (Manufacturing &

Services, Direct & Indirect)

• Understand various cost elements of a component &

Services.

• Understanding the basic costing Formula

• Understanding how to use the costing formula in

Materials, Use of Labor & Equipment, SG&A + Profit

• The end goal is to increase the Roush’s revenue and

improve profit or margins.

Process Cost

Material Cost

Materials SG&A + Profit

SG&A & PROFIT

Basics of Cost (In Manufacturing & Services)

4

Direct Material

Purchased Parts

Out Sourced Services

Direct Labor

Equipment Burden

Packaging

Cost – $Amount$ used to manufacture a Part (OR Amount Paid to Buy a Part)

SG&A (Executives, Finance,

Legal, Advertising, Sales Etc.)

Profit/Margin

4

Direct Labor- Wages- Benefits (Health Care, Vacation,

Holiday Pat, Federal Taxes Etc.)

5Laser Cutting Bending – Press BrakeRaw Material Storage

MANUFACTURING PLANT

OFFICE

Fork Lifter

Machine Operator

Machine Operator

Sales & Mkt

Air Compressor

Finance & Accounts

Executive

Corporate SG&A – All associated Cost + Material Cost- Material Cost- Freight- Unloading- Storage

Fork Lifts

Plant Mgt OfficeMaintenance Inspection Office

PurchasingEngineeringResearch and Development

Understanding Manufacturing Cost

Process (Equipment Burden )- Equip Depreciation (F)- Direct Consumables (V)- Shared Electricity & Gas (V)- Indirect Labor (V)- Shared Maintenance (F)- Shared Inspection (F)- Indirect Equipment (F)- Tooling Etc. (V)- Plant Mgt Team (F)- Rent/Building (F)- Property Tax (F)- Building Maintenance (F)F – Fixed, V – Variable Cost

Labor + Burden Cost- Burden For Vehicle- Burden For Tool Crib &

Tools- Electrician Hourly Rate- Home Office

Material Cost- Gas Cost- Filter Cost

Understanding Services Cost (Indirect)Example Of Indirect Service Type – Airconditioning Servicing Scope of Work – General Servicing, Gas Top-up & Replacement of Filters

Minimum Show Up Cost – $150

95 $/Hrs.

SG&A + PROFIT (Included in Hourly Rate)

MATERIALS(Mostly Purchased Items)

LABOR + BURDEN(Included in Hourly Rate)

SG&A + Profit- Included in the Labor &

Burden Hourly Rate- Markup on Materials

HOURLY RATE 95 $/Hrs

=

+

+

Basics of Cost Calculation (Manufacturing)

BASIC COST FORMULA Cost = Rate x Usage

Rate - $/Lbs., $/Pcs, $/Hrs. $/Day, $/Km etc.Examples - 5 $/Lbs. of Steel, 0.2 $/Pcs of Nut, 17 $/Hrs. of Labor Rate

Usage - #of Lbs., #of Inches, #of SqFt., # of Sec. Etc. Examples - 5 Lbs of Paint, 10 Inch of Laser Cutting, 3 SqFt of Finishing

• This Formula applies to any costing ( Manufacturing, Services, Indirect, Direct Etc.)• This applies anywhere ( A Hotel Rent, Purchase of Gasoline, A Rental Car, Bulk

Purchases, High Volume Purchases, Single Piece Purchases Etc.)

Steel Sheet – Rate 0.5 $/Lbs. Usage – 2.5 Lbs. Cost = 0.5*2.5 = $1.25

Laser Cut – Rate 1 Sec/Inch & 100 $/Hr Usage – 120 Inch Cost = 1*120/3600*100 = $3.33

Painting – Rate 20 Sec/Sqft & 200 $/Hr Usage – 2 Sqft Cost = 20*2/3600*200 = $2.22

Purchased Bolt – Rate 0.20 $/Pcs Usage – 2 Pcs Cost = 0.20*2 = $0.40

Mat

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Pro

cess

SG&

A +

Pro

fit

SG&A + Profit – Rate 20% Usage – $30 (Mfg. Cost) Cost = 20/100*30 = $6.00

Basics of Cost Calculation Examples (Manufacturing)

Cost = Rate x Usage

Basics of Cost Calculation (Indirect Services)

BASIC COST FORMULA $ = Rate x Usage

Rate - $/Hrs. $/PcsExamples - 75 $/Hrs. of Electrician Rate, 100 $/Hrs. of Plumber Rate, $100 for

Filter

Usage - # of Hours, # of Pieces (Filters)Examples - 3.5 Hrs. of Electrician Time, 10 Hrs. of Plumber Time, 5 # of

Filters

What Includes in $/Hrs.Cost For Process – (Labor Hourly Cost & Overhead Cost for Vehicle, Tools Etc.SGA & Profit – Applies on Material, Labor & Burden

Basic Of Cost Visibility (For Benchmarking & Negotiation)

Price

Based Benchmarking

Cost

Based Benchmarking

Rate & Usage

Based Benchmarking

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Commodity Manager: Date:

Roush Part Numbers : Customer/Program:

Description: SOP:

Roush Business Unit: Program Length (years):

CCR #:

RFQ DUE DATE:

Additional QCR's: List out applicable…. Service Requirements Yes

PPAP: Yes Required PPAP: None Feasibility Study Yes *See Tab 2

ITAR: No Conflict Minerals: Yes Packaging Questionnaire: Yes *See Tab 3

USA Material: No Material Cert: Yes Capacity Analysis: Yes *See Tab 4

USA Mfg.: No Process Certs: Yes Freight: Yes *If yes, please include freight in quote.

Inspection Reports: No Welding Docs: Yes Warranty:

NDT Test Reports: No First Article: No

PPAP Due Date PPAP Qty:

Supplier Name: Shipping Location:

Contact: Manufacturing Location:

Supplier Annual Sales: Manufacturing Method:

Tooling Lead Time: Production Lead Time:

PPAP/FAI Lead Time:

Part NumberAnnual

Volume

Raw Material

Cost

Purchased

Material Cost

Labor /

Burden

PKG

*TAB 4* MOQ

Freight (per part)

2345677 500 $ 6.0000 $ - $ 13.7000

Tooling By Part Number

Part Number

Name: Date

Inquiry #

Request for Quote

2345677

Sama

Rammy

3 Million

6 Week

Raw Material Type

Additional Requirements

All of the requested criteria on this RFQ form must be provided within this form and submitted to the buyer by the

due date above.

Always review the Guideline & Assumptions and Program Specific Requirements (if applicable) before completing the RFQ.

Review/fill out attached Purchase Order Addendums (if applicable)

Felcon Darlington

Quality Requirements Roush Quality Capability Requirements

SG&A/

Profit

Purchased

Material Type

Quote Based on Net 60 Payment Terms

Tool Description Tool Cost Timing (weeks)

Supplier Assumptions

If no-quoting, please provide

explaination:

All quote information provided by Supplier is subject to ROUSH's review, and may be accepted or challenged. By signing above and submitting its quote to ROUSH, Supplier represents it (a) has thoroughly

examined and become familiar with the Product(s)/Work covered under the RFQ, which are subject to the Roush Purchase Order General Terms and Conditions and Purchase Order Addendum(s), if applicable,

and (b) is capable of performing the quality of work required to achieve the stated Product(s)/Work objective identified in the RFQ.

Total

Piece

Price

$ 22.2000 Steel $ 2.5000

11

Basic Of Cost Visibility - Supplier Filled Roush RFQ (Direct)



Description: SOP:


CCR #:

RFQ DUE DATE:













PPAP/FAI Lead Time:

Part NumberAnnual

Volume

Raw Material

Cost

Purchased

Material Cost

Labor /

Burden

PKG

*TAB 4* MOQ

Freight (per part)

2345677 500 $ 4.0000 $ - $ 15.3300

Tooling By Part Number

Part Number

Name: Date

Inquiry #

Request for Quote

2345677

Aaron

Amit

5 Million

6 Week

Raw Material Type



due date above.



ADR Industries Fenton


SG&A/

Profit

Purchased

Material Type


Tool Description Tool Cost Timing (weeks)

Supplier Assumptions


explaination:




Total

Piece

Price

$ 20.2300 Steel $ 0.9000

Part NumberAnnual

Volume

Raw Material

Cost

Purchased

Material Cost

Labor /

Burden

PKG

*TAB 4* MOQ

Freight (per part)

2345677 500 $ 4.0000 $ - $ 15.3300

Raw Material Type SG&A/

Profit

Purchased

Material Type

Total

Piece

Price

$ 20.2300 Steel $ 0.9000

Part NumberAnnual

Volume

Raw Material

Cost

Purchased

Material Cost

Labor /

Burden

PKG

*TAB 4* MOQ

Freight (per part)

2345677 500 $ 6.0000 $ - $ 13.7000

Raw Material Type SG&A/

Profit

Purchased

Material Type

Total

Piece

Price

$ 22.2000 Steel $ 2.5000

ADR Industries Quote Falcon Quote

Basics of Cost Visibility (Manufacturing) 1/3

Final Price Based Benchmarking & Negotiation

In above scenario two quotes from different supplier shows price based opportunity on one of thesupplier. Typically here we would select ADR Industries for the business as their price is lowest.Assuming quality, delivery & payment terms are identical for both potential suppliers.

ADR Industries Falcon ADR Industries Falcon

Material 4.00$ 6.00$ 4.00$ 4.00$

Process Cost 15.33$ 13.70$ 13.70$ 13.70$

Profit 0.90$ 2.50$ 0.90$ 2.50$

Totals 20.23$ 22.20$ 18.60$ 20.20$

Cost Based Benchmarking


Cost Based Benchmarking & Negotiation

If we are able to get the cost breakdown (at cost level) then we can perform benchmarking & apply thesame to both supplier to identify additional opportunity as show in the above table and graph.Accordingly we can have supplier ADR Industries to further lower the price from $20.23 to &18.60.Therefore visibility in cost leads to better management and negotiation

$2

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$1

8.6

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ADR Industries Falcon ADR Industries Falcon

Material 4.00$ 6.00$ 4.00$ 4.00$

Process Cost 15.33$ 13.70$ 10.96$ 10.96$

Profit 0.90$ 2.50$ 0.90$ 2.50$

Totals 20.23$ 22.20$ 15.86$ 17.46$

Process Cost Drivers ADR Industries Falcon ADR Industries Falcon

Laser Cut Length 265 265 265 265

Laser Cutting Speed Inch/Min 50 40 50 50

Laser Burden Rate 149.00$ 98.10$ 98.10$ 98.10$

Labor Rate 26.50$ 26.00$ 26.00$ 26.00$

# of Operator 1 1 1 1

Process Cost 15.50$ 13.70$ 10.96$ 10.96$

Rate Benchmarking

Rate Based Benchmarking


Rate Based Benchmarking & Negotiation

If we are able to get morebreakdown (at RATElevel) then we canperform benchmarking atrate level to identifyadditional opportunity asshow in the tables andgraph.Accordingly we see nowthat ADR INDUSTRIESwill be lowest on cost$15.86. Thereforedetailed visibility in ratesand cost drivers leads tobetter opportunity.

VISIBILITY ON COSTLEADS TO BETTERCOST MANAGEMENT& NEGOTIATION.

$1

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$1

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Proposed RFQ Template for Indirect Services Current State – Roush has nostandard RFQ (with CostBreakdown Section) for supplierswho are providing INDIRECTservices & parts.

Snap shot is the proposed DRAFTof RFQ template for INDIRECTservices.

We can have Commodity specificRFQ (with Cost Breakdown Section)for better cost visibility to supportbetter cost management &negotiation

ROUSH Indirect Purchased & Service Items • Consumable Tooling, • Construction Services,• Packaging• Janitorial Services• Security Systems Etc.



Description: SOP:


CCR #:

RFQ DUE DATE:













PPAP/FAI Lead Time:

Part/Job Work Detail Quantity Total Hours

Minimum

Show Up

Cost

Plumbing Project 1 1 160.00 $ 150.00

Plumbing Project 2 1 60.00


Name: Date

Totals $ 60,500.00

Andy

0.9 Million

Purchased Material

Type

Filters & AC Gas

Purchased Material

Cost

$ 28,000.00

Hourly

Rate

$ 130.00

Labor + Overhead

Total Price

$ 48,800.00

Notes

Materials

Inquiry #

Request for Quote



due date above.



JK Sons


$ 130.00

$ 130.00

$ 7,800.00

$ 3,900.00


explaination:






Minimum

Show Up

Cost




Purchased Material

Type

Filters & AC Gas

Purchased Material

Cost

$ 20,100.00

Hourly

Rate

$ 150.00

Labor + Overhead

Total Price

$ 35,100.00

Notes

Materials

$ 150.00

$ 150.00

$ 7,500.00

$ 3,750.00



Description: SOP:


CCR #:

RFQ DUE DATE:













PPAP/FAI Lead Time:


Minimum

Show Up

Cost




Name: Date

Totals $ 46,350.00

Sumit

1.2 Million

Purchased Material

Type

Filters & AC Gas

Purchased Material

Cost

$ 20,100.00

Hourly

Rate

$ 150.00

Labor + Overhead

Total Price

$ 35,100.00

Notes

Materials

Inquiry #

Request for Quote



due date above.



AD Enterprises


$ 150.00

$ 150.00

$ 7,500.00

$ 3,750.00


explaination:







Description: SOP:


CCR #:

RFQ DUE DATE:













PPAP/FAI Lead Time:


Minimum

Show Up

Cost




Name: Date

Totals $ 60,500.00

Andy

0.9 Million

Purchased Material

Type

Filters & AC Gas

Purchased Material

Cost

$ 28,000.00

Hourly

Rate

$ 130.00

Labor + Overhead

Total Price

$ 48,800.00

Notes

Materials

Inquiry #

Request for Quote



due date above.



JK Sons


$ 130.00

$ 130.00

$ 7,800.00

$ 3,900.00


explaination:






Minimum

Show Up

Cost




Purchased Material

Type

Filters & AC Gas

Purchased Material

Cost

$ 28,000.00

Hourly

Rate

$ 130.00

Labor + Overhead

Total Price

$ 48,800.00

Notes

Materials

$ 130.00

$ 130.00

$ 7,800.00

$ 3,900.00

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Basic Of Cost Visibility - Supplier Filled Roush RFQ (Indirect)

AD Enterprise JK Sons Quote

Basics of Cost Visibility & Comparison (Indirect Service)

Rate Benmarking

AD Enterprise JK SONS AD Enterprise JK SONS AD Enterprise

Plumbing Rate 150.00$ 130.00$ 150.00$ 130.00$ 130.00$

Activity Breakdown

Project 1 100 160 15,000$ 20,800$ 13,000$

Project 2 50 60 7,500$ 7,800$ 6,500$

Project 3 25 30 3,750$ 3,900$ 3,250$

Mateial Cost 20,100.00$ 28,000.00$ 20,100$ 28,000$ 20,100$

Totals 46,350$ 60,500$ 42,850$

Opportunity Additional Opportunity

14,150$ 3,500$

% %

30.5% 7.6%

Minimum Show Up Cost 200.00$ 150.00$

Cost

PLUMBING COST BREAKDOWN, COMPARISON & BENCHMARKING

Hours

Recommendation

• Have Cost Breakdown for Direct & Indirect Parts & Services

• Prefer Commodity based Cost Breakdown for Direct & Indirect Parts & Services

• Cost Formula “Cost = Rate X Usage” can be used for both Direct & Indirect Services.

• At Minimal Perform Benchmarking at Cost Level (by each cost category) – Material, Processing, SG&A

• In order to get more opportunity perform Benchmarking at Rate & Usage Level (for each categories)

What is the Basic Costing Formula?

Answer Options

A. Cost = (Rate) / (Usage)

B. Cost = (Rate) x (Usage)

C. Cost = (Rate) + (Usage)

D. Cost = 2 x ((Rate) x (Usage))

Test QuestionQ

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The Basic Costing formula is applied to which of the below mentioned items?

Answer Options

A. Material

B. Process Cost

C. SG&A + Profit

D. All of the Above

The Basic Costing formula can be applied to?

Answer Options

A. Manufacturing Industry

B. Service Industry

C. Indirect Purchases

D. All of the Above

Test Question…continuedQ

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In Costing Formula (Cost = Rate X Usage), identify correct example of a Rate?

Answer Option

A. 2 # of Purchased LT20 CNC Turning Machine,

B. 10 # of Fire Extinguisher for Factory Premises

C. 150 $/Pcs for Fire Extinguisher.

D. 2000 Meters of Electric Wire for Office electricity connection.

In Costing identify correct example of Usage

Answer Option

A. 2.0 $/Lbs of Steel in Material

B. 10 Inches of Laser Cutting

C. 3 Inch/Minute of Laser Cutting Speed

D. Direct Labor Rate of 20 $/Hour


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Qu

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In Costing identify correct example of Rate?

Answer Option

A. 2 Lbs of Steel in Material,

B. 3 Bends in Press Brake

C. 30 Inch/Minute of Welding Speed

D. 2 # of Direct Operator on Laser Machine


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While cost benchmarking what item do we analyze

Answer Options

A. Cost Per Pound for Steel, Pounds of Steel Used

B. Cycle Time to produce one part.

C. SG&A and Profit Percentage

D. All of the above.

Select Appropriate Example of Direct Labor

Answer Options

A. Operator involved in producing injection molded part on Injection Molding machine.

B. Operator painting the finished component for the customer.

C. A forklift driver moving the parts.

D. Both A & B.


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Identify Direct Material from below list

Answer Options

A. Fixture for Welding

B. Steel Billet in Forging Plant.

C. Blasting Iron Shots in Forging Plant

D. Generic Re-useable Masking Plugs for Painting.

What do you mean by SG&A Cost

Answer Options

A. It is the Cost Associated with Material Acquisition.

B. It is Cost Associated with Setting up of Process.

C. All cost associated with Corporate Overhead.

D. Shipping & Warehousing.


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What is the typical profit range in manufacturing industry

Answer Options

A. 0-5%

B. 5-25%

C. 25-50%

D. 50-75%

Define Profit Margin in Costing.

Answer Options

A. Profit Margin is financial gain and is percentage to sell price.

B. Profit Margin is the direct labor cost.

C. Profit Margin is the processing cost in manufacturing.

D. Profit Margin is the is the material cost.


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What do you mean by Gross Weight while costing material?

Answer Options

A. Gross Weight is the weight of the finished part.

B. Gross Weight is the actual weight required while producing a part.

C. None of the above

What is Engineered Scrap Cost in Material.

Answer Options

A. It is the cost of total material used in manufacturing.

B. It is the cost of the material based on net weight of the part.

C. It is the cost of the difference between Gross weight and Net weight of the material .

D. None of the above.

What is the typical Cost Breakdown for a indirect plumbing work

Answer Options

A. Final Plumbing Cost

B. Hourly Labor Rate, Hour Required for each activity, Individual Price & Quantity for Consumables, Others Charges

C. None of the above.


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What would you like to Benchmark between different quotes for plumbing work to identify

maximum saving

Answer Options

A. Compare Final Price between each quote

B. Analyze Hourly Labor Rate & Hours Required.

C. Analyze Individual Price & Quantity for Materials. Also Analyze Others Charges.

D. Both B & C

Basic Of Costing (Products & Services Direct & Indirect)

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