Costengineering

CostEngineering

Manufacturing cost accounting, analysis, and reduction methodologies for MNMUK operations. Complements QuoteEstimator (quick quotes) and SupplyChain (strategic sourcing) with detailed cost engineering.

Workflow Routing

Workflow	Trigger	File
OverheadCalculation	"overhead rate", "burden rate", "labour rate"	Workflows/OverheadCalculation.md
VarianceAnalysis	"cost variance", "variance investigation"	Workflows/VarianceAnalysis.md
MakeVsBuy	"make vs buy", "insource", "outsource"	Workflows/MakeVsBuy.md
CostReduction	"cost reduction", "value engineering"	Workflows/CostReduction.md

Cost Accounting Fundamentals

Cost Structure

┌─────────────────────────────────────────────────────┐
│                 TOTAL PRODUCT COST                  │
├─────────────────────────────────────────────────────┤
│  ┌─────────────────────────────────────────────┐   │
│  │           MANUFACTURING COST                │   │
│  │  ┌───────────────────────────────────────┐  │   │
│  │  │         PRIME COST                    │  │   │
│  │  │  ┌─────────────┐  ┌─────────────┐    │  │   │
│  │  │  │  Direct     │  │  Direct     │    │  │   │
│  │  │  │  Material   │  │  Labour     │    │  │   │
│  │  │  └─────────────┘  └─────────────┘    │  │   │
│  │  └───────────────────────────────────────┘  │   │
│  │  ┌───────────────────────────────────────┐  │   │
│  │  │      Manufacturing Overhead           │  │   │
│  │  │  (Indirect labour, utilities,         │  │   │
│  │  │   depreciation, maintenance)          │  │   │
│  │  └───────────────────────────────────────┘  │   │
│  └─────────────────────────────────────────────┘   │
│  ┌─────────────────────────────────────────────┐   │
│  │              SG&A Overhead                  │   │
│  │  (Sales, admin, quality, engineering)      │   │
│  └─────────────────────────────────────────────┘   │
└─────────────────────────────────────────────────────┘

Cost Categories

Category	Examples	Behaviour
Direct Material	Raw material, bought-out components	Variable
Direct Labour	Operator time on product	Variable
Manufacturing Overhead	Supervision, utilities, depreciation	Mixed
SG&A	Sales, admin, quality	Fixed

Labour Rate Structure

Rate Type	Components	Use
Direct Labour Rate	Wages + benefits	Actual operator cost
Burdened Labour Rate	Direct + manufacturing overhead	Product costing
Fully Burdened Rate	Burdened + SG&A allocation	Pricing

MNMUK Labour Rate Build-Up:

Base Hourly Wage                    £15.00
+ Employer NI (13.8%)               £ 2.07
+ Pension (5%)                      £ 0.75
+ Holiday accrual                   £ 1.44
+ Training allowance                £ 0.50
─────────────────────────────────────────
= Direct Labour Rate                £19.76

+ Manufacturing Overhead (150%)     £29.64
─────────────────────────────────────────
= Burdened Labour Rate              £49.40

+ SG&A (25%)                        £12.35
─────────────────────────────────────────
= Fully Burdened Rate               £61.75

Machine Hour Rates

Cost Centre	Machine Rate	Labour Rate	Combined
CNC Turning	£35/hr	£50/hr	£85/hr
CNC Milling	£40/hr	£50/hr	£90/hr
5-Axis	£65/hr	£55/hr	£120/hr
Swiss	£55/hr	£55/hr	£110/hr
EDM	£45/hr	£50/hr	£95/hr
Assembly	£10/hr	£50/hr	£60/hr

Overhead Rate Calculation

Manufacturing Overhead Components

Category	Examples	Allocation Base
Indirect Labour	Supervisors, material handlers	Direct labour hours
Utilities	Electric, gas, water	Machine hours
Depreciation	Equipment, tooling	Machine hours
Maintenance	Repairs, PM	Machine hours
Consumables	Cutting tools, coolant	Machine hours
Facility	Rent, rates, insurance	Floor space

Overhead Rate Formula

Predetermined Overhead Rate = Estimated Overhead / Estimated Activity

Example:
Annual Manufacturing Overhead:    £1,200,000
Estimated Machine Hours:          30,000 hrs
────────────────────────────────────────────
Overhead Rate:                    £40/machine hour

Absorption vs Actual

Term	Definition
Absorbed Overhead	Hours worked × Predetermined rate
Actual Overhead	Real costs incurred
Over-absorption	Absorbed > Actual (favourable)
Under-absorption	Absorbed < Actual (unfavourable)

Product Cost Calculation

Standard Cost Build

## Product Cost Sheet

**Part Number:** [P/N]
**Description:** [Name]
**Effective Date:** [Date]

### Material Cost

| Component | Qty | Unit Cost | Extended |
|-----------|-----|-----------|----------|
| Raw material | [kg] | £[X]/kg | £[X.XX] |
| Bought-out parts | [#] | £[X.XX] | £[X.XX] |
| **Material Total** | | | **£[X.XX]** |

### Conversion Cost

| Operation | Time (min) | Rate (£/hr) | Cost |
|-----------|------------|-------------|------|
| Op 10 - Turn | [X] | £85 | £[X.XX] |
| Op 20 - Mill | [X] | £90 | £[X.XX] |
| Op 30 - Inspect | [X] | £60 | £[X.XX] |
| **Conversion Total** | [X] min | | **£[X.XX]** |

### Cost Summary

| Element | Cost | % |
|---------|------|---|
| Material (incl. scrap/yield loss) | £[X.XX] | [X]% |
| Conversion (machining + setup amortised) | £[X.XX] | [X]% |
| Inspection / Quality | £[X.XX] | [X]% |
| General Overhead Allocation (facility, indirect costs) | £[X.XX] | [X]% |
| **Standard Cost (Manufacturing)** | **£[X.XX]** | [X]% |
| SG&A + Profit Margin (e.g. 25%) | £[X.XX] | [X]% |
| **Total Selling Price** | **£[X.XX]** | 100% |

> **Note:** Always include general overhead allocation (facility rent, rates, indirect labour absorption) as a distinct line item, and always show target selling price = Standard Cost ÷ (1 − margin%) to confirm commercial viability.

Yield and Scrap Impact

Gross Material Cost = Net Material × (1 / Yield %)

Example:
Net material required:     0.5 kg
Material yield:           85%
Gross material:           0.5 / 0.85 = 0.588 kg
Scrap cost:               0.088 kg × £5/kg = £0.44

Variance Analysis

Variance Types

Variance	Formula	Favourable When
Material Price	(Actual - Standard Price) × Actual Qty	Actual < Standard
Material Quantity	(Actual - Standard Qty) × Standard Price	Actual < Standard
Labour Rate	(Actual - Standard Rate) × Actual Hours	Actual < Standard
Labour Efficiency	(Actual - Standard Hours) × Standard Rate	Actual < Standard
Overhead Spending	Actual - Budgeted	Actual < Budget
Overhead Volume	Budgeted - Absorbed	Absorbed > Budget

Investigation Thresholds

Variance Type	Investigate If
Material Price	>5% or >£500
Material Quantity	>3% or >£300
Labour Rate	>3% or >£200
Labour Efficiency	>5% or >£500
Overhead	>£1,000/month

Make vs Buy Analysis

Decision Framework

┌────────────────────────────────────────┐
│          MAKE VS BUY DECISION          │
├────────────────────────────────────────┤
│                                        │
│  Make Cost = Variable + (Fixed/Volume) │
│  Buy Cost = Purchase Price + Logistics │
│                                        │
│  If Make < Buy AND Capacity Available  │
│     → MAKE                             │
│  If Buy < Make OR No Capacity          │
│     → BUY                              │
│                                        │
└────────────────────────────────────────┘

Cost Comparison Template

Element	Make	Buy
Material	£[X]	Included
Direct Labour	£[X]	—
Variable Overhead	£[X]	—
Purchase Price	—	£[X]
Freight/logistics	—	£[X]
Incoming inspection	—	£[X]
Variable Cost	£[X]	£[X]
Fixed Overhead (avoidable)	£[X]	—
Total Relevant Cost	£[X]	£[X]

Qualitative Factors

Factor	Make	Buy
Capacity utilization	Increases	No change
Quality control	Direct	Relies on supplier
Lead time	Internal control	Supplier-dependent
IP protection	Better	Risk of exposure
Flexibility	Higher	Lower
Capital requirement	Higher	Lower

Cost Reduction Methodologies

Value Engineering (VE)

FAST Diagram Approach:

• Function - What does it do?
• Analysis - Why is it needed?
• System - How does it work?
• Technique - Can it be done differently?

VE Questions:

1. What is the function?
2. What does it cost?
3. What else can perform the function?
4. What does the alternative cost?

Cost Reduction Techniques

Technique	Application	Typical Savings
Eliminate	Remove unnecessary features	5-20%
Combine	Merge operations	3-10%
Simplify	Reduce complexity	5-15%
Substitute	Alternative materials/processes	5-25%
Standardize	Use common components	3-10%

Target Costing

Target Cost = Market Price - Required Margin

Example:
Market price:          £50.00
Required margin:       25%
Target cost:           £37.50
Current cost:          £42.00
Cost gap:              £4.50 (12% reduction needed)

Integration with Other Skills

Skill	Integration
QuoteEstimator	Use cycle times, apply overhead rates
SupplyChain	Should-cost analysis, TCO
Pfmea	Cost impact of failure modes
Controlplan	Inspection cost allocation
Spc	Cost of variation
A3criticalthinking	Root cause of cost variances

Key Metrics

Metric	Formula	Target
Conversion cost ratio	Conversion / Total cost	<60%
Material yield	Good output / Input	>95%
Labour efficiency	Standard / Actual hours	>90%
Overhead absorption	Absorbed / Actual	98-102%
Cost variance	(Actual - Standard) / Standard	<±5%

Examples

Example 1: Calculate product cost

User: "What's the full cost for part ABC-123?"
→ Gather material cost (raw + BOPs)
→ Calculate conversion (cycle time × rates)
→ Apply overhead absorption
→ Build standard cost sheet
→ Compare to quote price for margin

Example 2: Investigate cost variance

User: "Labour efficiency is 85% this month - why?"
→ Pull actual vs standard hours by product
→ Identify largest variances
→ Analyze root causes (setup, rework, learning)
→ Recommend corrective actions
→ Update standards if appropriate

Example 3: Make vs Buy decision

User: "Should we outsource the grinding operation?"
→ Calculate internal cost (variable + avoidable fixed)
→ Gather supplier quotes
→ Include logistics and quality costs
→ Assess capacity impact
→ Consider qualitative factors
→ Make recommendation with payback