1. Ch 8-1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Cost Analysis and Estimating for Engineering and Management Chapter 8 Product Estimating

2. Ch 8-2 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Overview l Processes for Determining Price  Bottom Up and Top Down l Using Productive Hour Costs l Learning in Product Cost Estimating l Methods to Establish Price l Purchasing Contracts l Benchmarking

3. Ch 8-3 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management The Product Estimate l Must Include All Parts  All Operations, Direct and Indirect  Overhead, Engineering, Sales l Determines  Price, Cost, Profit  Cash Flow, Rate of Return  Labor Requirement, Scheduling

4. Ch 8-4 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Market Place l Market Determines Price Paid l Attainable Price Should Exceed Cost l Price Also Determines Quantity Sold l Price from the “Top Down”  Sets Allowable Costs

5. Ch 8-5 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Price Elements

6. Ch 8-6 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Estimated Cost l Components of “Cost of Goods Manufactured” and Overhead (Gen & Admin) Previous Discussions l Engineering and Sales l Contingencies  Provides for Unknowns  Radically New Products/Processes  Not for “Pad” or Poor Estimates

7. Ch 8-7 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Product Cost Elements

8. Ch 8-8 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Selecting Method vs Quantity

9. Ch 8-9 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Engineering Costs l Design of the Product l R & D l Engineering for Products Not Produced l Support Engineering  Manufacturing, Industrial  Test, QC

10. Ch 8-10 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Handling Engineering Costs l Overhead  Mass Production, Few New / Changes l Separate Line Item(s)  High Tech, Services l Amortize to Products Produced Eq 8.1

11. Ch 8-11 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Finding Engr Costs l Include All Elements  Salaries  Expenses  Overhead  Fees Paid C e =  S +  E +  OH +  F Eq 8.2

12. Ch 8-12 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Example of Engr Costs Work Category Hr Rate / hrTotals Engineer, senior design40$33.00$1,320 Engineer, design80030.0024,000 Designer/engineering. aide16018.753,000 CAD operator8017.001,360 Total Engineering Labor1080 $29,680

13. Ch 8-13 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Information for Estimating l Need to Know:  What Does It Look Like?  How Many? (Will Be Made) l Determines:  Manufacturing Processes  Labor Requirements

14. Ch 8-14 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management RFE Should Include l Engineering Documents  Drawings, BOM Specs l Schedule Dates  Estimate, Production l Build Quantities

15. Ch 8-15 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Bill of Material l One for Every Part and Assembly l Collect from the Top Down l Include Quantities l Assemble a Structure (Tree) to Collect Estimates - From the Bottom Up l Estimate Individual Parts and Assembly

16. Ch 8-16 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Product Tree with Costs

17. Ch 8-17 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Costed Bill of Material Lvl Desc Qty Next Unit Matl Unit Labor Total Unit Cost to Next 1TopN/A$396.24$17.21$413.45---- 2Gskt102.39 2Tank110.41.2410.65 3Chas4.10.04.14.56 3Screw4.040.16 3Assy16.683.019.69 2Hatch846.221.6847.90383.2 3Sheet49.57.5210.0940.36 3Stiffer22.39.172.565.12 3Chas3.10.04.14.42 3Screw8.040.32

18. Ch 8-18 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Compiling the Estimate l Need to Determine Full Cost  Includes Overhead Allocations l Two Methods  Productive Hour Cost (PHC)  Activity Based Costing (ABC) l The Product Estimate is a Formal Document

19. Ch 8-19 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management PHC Method l Labor Estimates in Hours l Need “Rate” to Multiply for Cost l PHC Rate (Section 4.9.5) l Labor Including  Wages, Fringes, Overhead, Indirect l Machine Costs

20. Ch 8-20 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Calculating PHC Costs l Total Unit Cost l Total Product Cost Eq 8.3 Eq 8.6

21. Ch 8-21 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management PHC Cost Example

22. Ch 8-22 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Activity Based Costing (ABC) l PHC Ties Overhead to All Products without Regard for What Is Used l ABC Attempts to Allocate Overhead to Products Usage  What Is Used  How Much Is Used

23. Ch 8-23 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management ABC Concepts l Associate Overhead Costs to Activities l Predetermine O/H Costs per Unit of Activity  Units May Not Always Be Hours  Total Expected Cost Divided by Total Expected Units of Activity for Rate  e.g. Purchasing Dept Cost / No. of POs

24. Ch 8-24 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Using ABC for an Estimate l Determine O/H Activities Needed l Determine Amount of Each Activity l Use Rate for Each Activity Eq 8.7

25. Ch 8-25 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Learning at the Product Level l Performance Improves with Experience l First Unit Labor Hours Depend on  Company Experience  Amount of Preparations  Product Characteristics l Apply Learning Factor per Cost Element Eq 8.8

26. Ch 8-26 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Sources for Improvement l Operator (15%) l Design (50%) l Manufacturing Engineering (35%) l Requires Specific Effort l Best Candidate Products  High Cost, Low Volume

27. Ch 8-27 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Learning Uses l Price Negotiations l Make-Buy Decisions l Product Cost Based on Prototype l Costs for Additional Orders  Follow-On Procurement  Engineering Change Orders  Breakeven Analysis

28. Ch 8-28 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Follow-On Procurement l Ref. Chapter 6 (Learning) Determine a Learning Curve ( K, s ) l Calculate Total Costs l Subtract Cost for First Units from Cost of All Units Through Follow On Build

29. Ch 8-29 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Engineering Change Order (ECO) l Design Change(s) to Existing Product l ECO Affects Future Units l Does ECO Require Change (Retrofit) to Existing Units (Prior Production)? l Is There a Change to Cost?

30. Ch 8-30 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Simple ECO (No Retrofit)

31. Ch 8-31 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management ECO with Retrofit

32. Ch 8-32 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Calculating a Retrofit ECO 1) Find Cost for Production of Existing 2) Find Retrofit Cost 3) Find Cost for Continuing Production From ECO Incorporation to End of Run 4) Sum 1-3 Above 5) Compare to Cost without ECO

33. Ch 8-33 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Breakeven with Learning l Conventional Breakeven Assumes Variable Cost Is Constant Pn be = n be C v + C f Eq 8.9 l Learning Assumes Variable Cost Decreases Eq 8.10

34. Ch 8-34 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Conventional Breakeven

35. Ch 8-35 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Breakeven with Learning

36. Ch 8-36 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Determining Price l Market Determines “Economic Want” l Supply and Demand l Price Customer Will Pay l Customer’s Price Includes  Vendors Price (Cost Plus Profit)  Transportation Costs  Wholesale & Retail Costs and Profit

37. Ch 8-37 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Producer’s Price l For Engineering Estimating  Expected Price Minus Expected Cost l Estimated Profit May NOT Equal Actual Profit l Engineering Wants Costly Designs l Manufacturing Over-Estimates Costs l Marketing Wants Low Price l Need “Reasonable” Compromise

38. Ch 8-38 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Pricing Concepts l Price Proportional to (Total) Cost l Price Proportional to Conversion Cost l Price Proportional to Variable Cost l Price Determined by Market l Price Is Not Always the Sole Basis for Competition

39. Ch 8-39 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Judgment Pricing l Experience l Discussion (Opinion, Conference, Comparison) l Future Will Not Be Like the Past

40. Ch 8-40 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Markup on Cost l Full Cost P = C t + R m (C t ) l Value Added (Direct Labor + Overhead) P =  C dl (1 + R oh )(1 + R m ) + C dm l Direct Cost (Labor + Materials) P = (  C dl +  C dm )(1 + R m ) + C oh Eq 8.11 Eq 8.12 Eq 8.13

41. Ch 8-41 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management l Return on Investment  Return Must Exceed Capital Cost l Markup on Sales More Markup Eq 8.14 Eq 8.15

42. Ch 8-42 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Contribution l Price Based on Variable Costs l Contribution Is the Amount Left After Paying Variable Costs l Covers Fixed Costs and Profit Eq 8.16

43. Ch 8-43 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Price Estimating Relationships l Prices Predicted Over a Period of Time l Market Establishes a Price Ceiling l Producer Establishes a Price Floor  Cost Plus Profit Required l Difference Is the Opportunity Margin l Supply and Demand Controls

44. Ch 8-44 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Opportunity Margin l Can Be Used to Set Price l Prices Usually Decline with Time l Also Determines Life Cycle l Market Model Eq 8.17

45. Ch 8-45 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Opportunity Margin Model

46. Ch 8-46 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Break Even with Margins

47. Ch 8-47 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Contracts l Buying and Selling Involves Contracts  Purchase Orders  Quotations / Estimates  Legal Consequences l Two Types of Sales Contracts  Firm Fixed Price  Cost-Reimbursable

48. Ch 8-48 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Fixed-Price Contracts l Used for  Low Tech, Well Developed Products  High Quantities  Short Duration l Supplier Assumes Risks If Costs Go Up l Supplier Benefits from Any Savings l Buyer Benefits from Known Price

49. Ch 8-49 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Fixed-Price Based on Hourly Cost l Quoted Hourly Rate (PHC + Profit) l Multiplied by Actual Time Spent l Used If Job Scope Is Unpredictable l Sometimes Bid as “Time and Materials” l Also:  Quote or Price in Effect  Pass Through Material Cost Increases

50. Ch 8-50 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Cost Reimbursement l High Technology l High Risk l Low Degree of Definition l Customer Assumes Most or All of Risk  Negotiated Risk/Benefit Sharing Proportion l “Cost Plus” a Fee or Profit  Negotiated, Sometimes with Incentives

51. Ch 8-51 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Other Uses for Estimates l Make / Buy Decisions l Breakeven Analysis l Value Engineering l Concurrent Engineering  DFM and DFA  Design to Cost

52. Ch 8-52 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Make vs. Buy l Be Sure to Compare Equal Situations  If Make Cost Includes Design Cost  Design Cost Must Be Added to Buy Price l Include ALL Costs of Buying  Transportation  In House Costs for Purchasing/Receiving  Intangibles (Quality, Schedule, etc)

53. Ch 8-53 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Concurrent Engineering l Saves Money and Time l Reduces Changes and Time to Market l Recognizes Cost as a Design Reqm’t l Savings  30% Less Development Time  65% Fewer Engineering Changes  20% Less Time to Market

54. Ch 8-54 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Benchmarking – Exclusion Chart

55. Ch 8-55 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Benchmarking – Feature Map

56. Ch 8-56 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Benchmarking – Envelope Fan

57. Ch 8-57 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Benchmarking – Design to Cost

58. Ch 8-58 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

59. Ch 8-59 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

60. Ch 8-60 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

61. Ch 8-61 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Summary l Determined Product Costs  Applied Learning and PHC l Studied Tools for Establishing Prices  Bottom Up and Top Down l Looked at Purchasing Contracts l Peeked into the Future of Estimating