ESTIMATION OF

EXPENSES

Kuliah Ekonomi Teknik

JTK FT UGM 2011

Total product cost

Total product cost: costs for operating the plant and selling the products.

Total product cost =+ Manufacturing cost+ General expenses

Total product costManufacturing cost

Direct production

Fixed charges

Plant overhead

General expensesAdministrative

Distribution and marketing

Research and development

Financing

Gross-earning

Direct production cost

Raw materials Operating labor Operating supervision Steam Electricity Fuel Refrigeration Water

Power and utilities Maintenance and

repairs Operating supplies Laboratory charges Royalties (if not on

lump-sum basis ) Catalysts and solvents

Fixed charges Depreciation Taxes (property) Insurance Rent

Plant overhead costs Medical Safety and

protection General plant

overhead Payroll overhead Packaging Restaurant

Recreation Salvage Control laboratories Plant

superintendence Storage facilities

Administrative expenses

Executive salaries Clerical wages Engineering and legal costs Office maintenance Communications

Distribution and marketing expenses Sales offices Salesmen expenses Shipping Advertising Technical sales service

Research and development expenses Research and development expenses are

incurred by any progressive concern which wishes to remain in a competitive industrial position.

These costs are for salaries, wages, special equipment, research facilities, and consultant fees related to developing new ideas or improved processes

Financing expenses Financing expense is usually limited to

interest on borrowed money, and this expense is sometimes listed as a fixed charge.

Interest is considered to be the compensation paid for the use of borrowed capital. Annual interest rates amount to 5 to 10 percent of the total value of the borrowed capital.

Gross-earnings expenses The total income minus the total production

cost gives the gross earnings made by the particular production operation, which can then be treated mathematically by any of several methods to measure the profitably of the proposed venture or project.

Because of income-tax demands, the final netprofit is often much less than the gross earnings. Income-tax rates are based on the gross earnings received from all the company interests.

Estimation of total product cost (showing individual components) The percentages indicated in the following

summary of the various costs involved in the complete operation of manufacturing plants are approximations applicable to ordinary chemical processing plants.

It should be realized that the values given can vary depending on many factors, such as plant location, type of process, and company policies. Percentages are expressed on an annual basis.

Estimation of total product costI. Manufacturing cost = direct production costs + fixed

charges + plant overhead costs

A. Direct production costs (about 60% of total product cost)

1 . Raw materials (10-50% of total product cost)

2 . Operating labor (10-20% of total product cost)

3 . Direct supervisory and clerical labor (10-25% of operating labor)

4 . Utilities (10-20% of total product cost)

5 . Maintenance and repairs (2-10% of fixed-capital investment)

6 . Operating supplies (10-20% of cost for maintenance and repairs, or 0.5-1% of fixed capital investment)

7 . Laboratory charges (10-20% of operating labor)

8. Patents and royalties (0-6% of total product cost)

Estimation of total product cost

B. Fixed charges (10-20% of total product cost)

1 . Depreciation (depends on life period, salvage value, and method of calculation-about 10% of fixed-capital investment for machinery and equipment and 2-3% of building value for buildings)

2 . Local taxes (1-4% of fixed-capital investment)

3. Insurance (0.4-1% of furedcapital investment)

4 . Rent (8-12% of value of rented land and buildings)

Estimation of total product cost

C . Plant-overhead costs (50-70% of cost for operating labor, supervision, and maintenance, or 5-15% of total product cost); includes costs for the following: general plant upkeep and overhead, payroll overhead, packaging, medical services, safety and protection, restaurants, recreation, salvage, laboratories, and storage facilities.

Estimation of total product cost

II. General expenses = administrative costs + distribution and selling costs + research and development costs + financing

A. Administrative costs (about 15% of costs for operating labor, supervision, and maintenance, or 2-6% of total product cost); includes costs for executive salaries, clerical wages, legal fees, office supplies, and communications

B. Distribution and selling costs (2-20% of total product cost); includes costs for sales offices, salesmen, shipping, and advertising

C . Research and development costs (2-5% of every sales dollar or about 5% of total product cost)

D. Financing (interest) (0-10% of total capital investment)

Estimation of total product cost

III. Total product cost = manufacturing cost + general expenses

If desired, a contingency factor can be included by increasing the total product cost by l-5%.

IV. Gross earnings cost (gross earnings = total income - total product cost; amount of gross earnings cost depends on amount of gross earnings for entire company and income-tax regulations; a general range for gross-earnings cost is 30-40% of gross earnings)

Profit estimateSales ………………………………….

Rp

Manufacturing cost …… Rp

General expense ……….. Rp

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Total cost ……………………………

Rp

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Profit before taxes …………….. Rp

Income taxes ……………………..

Rp

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Profit after taxes ……………….. Rp

Sales

Determining sales price: If the product is already being

manufactured by competitors: the price set at or below competitive values

If the product is new but its utilization lies in fields being supplied by established materials: the price determined by competitive products performance

Other than those two situations: the price = total cost + desired profit

The effect of variable condition upon costs and profits

Type of costs: Fixed costs (constant at all production levels)

Depreciation, taxes, insurance Variable costs ( directly proportional to

production level)Raw materials, packaging containers, utilities,

shipping, royalties Regulated costs ( somewhat proportional to

production level)Labor, overhead, supervision, laboratory, general

expenses, maintenance, plants supplies

Capacity, %

Break-even chart

Regulated expenses

Sales

Fixed expenses

Variable expenses

Total cost

Break-even Point (BEP)

Shutdown Point (SDP)

Profit

Loss

Rp/

year

Ra

Va

Fa

Sa

0.3Ra

Garis sejajar sales

References

1. Peters, M.S., Timmerhaus, K.D., Plant Design and Economics for Chemical Engineers, 4th ed., McGraw Hill, New York, 1991

2. Aries,R.S., Newton,R.D., Chemical Engineering Cost Estimation, McGraw Hill, New York, 1955

3. Silla, H., Chemical Process Engineering: Design and Economics, MARCEL DEKKER, INC, New York, 2003