ESTIMATING:
Estimating is process of calculating the probable cost of a product before the start of manufacturing. It is an art of finding the cost, which is likely to be incurred on manufacturing a product.
IMPORTANCE OF ESTIMATING:
In this era of quality awareness, rapid development and tough competition in satisfying the variant demand of the customer, it becomes necessary for an organization to have advanced information about the cost of product to be manufactured. When a new product is launched in the market, the estimation of cost is carried out by calculating direct and indirect material cost, labour cost and overhead cost. The accurate estimating is very important to compete in the market and to ensure whether the manufacturing of a particular product will be profitable or not. Both over-estimating and under-estimating is dangerous for the organization. Over-estimating leads to increase the cost and the tenders may not get a good response. On the other hand, under-estimating leads to heavy losses to the company. Hence, the estimating department must be well qualified, experienced and well trained for accurate estimation.
COSTING:
Costing or cost accounting may be defined as a system which records all the expenditure to determine the cost of manufactured products. It may also be defined as a system of accounts which records every expenditure systematically and accurately in order to determine the cost of a product after knowing various expenses incurred on the product in various departments.
PURPOSES OF COSTING:
The various purposes of costing are as follow:
1. To determine the cost of each item.
2. To achieve more economy in production.
3. To determine the cost incurred in each operation.
4. To keep control on wages.
5. To help in deciding the selling prices of the products.
6. To earn more profits.
7. To reduce wastage by adopting various corrective measures.
8. To identify various causes of increase or decrease in profits.
9. To give suggestions regarding modification in design, when cost is higher.
10. To help in reducing total cost of production.
ELEMENTS OF COST:
The total cost of a product can be divided into three main elements which are as follow: 1. Materials, 2. Labour, 3. Expenses.
1. Materials:
Materials can be further classified as follow: (i) Direct materials, (i) Indirect material.
(i) Direct Materials:
Direct materials are also known as productive materials. These are the materials which are processed in the factory shops through various stages to give final shape of the main product or components of the main product. e.g. wood for furniture, mild steel for shafts, bolts etc.
(ii) Indirect Materials:
These are the materials which are necessary for production processes, but not directly used in the product. e.g. grease, oils, sand papers, coolants, cotton waste etc. It should be noted that the same material may be a direct material for one manufacturer while it can be an indirect material for the other manufacturer.
Calculation of Material Cost:
The following procedure may be adopted for calculating the material cost:
(i) Calculate the volume of each component by using mensuration formulae.
(ii) Calculate the volume of product by adding volumes of all the components of the product.
(iii) Calculate the weight of the product by multiplying the volume with the density of the product.
(iv) Calculate the material cost by multiplying the total weight of the material with the cost per unit weight.
2. Labour:
Labour employed in any factory can be classified as follows: (i) Direct labour, (ii) Indirect labour.
(i) Direct Labour:
Direct labour is also known as production labour. Direct labour constitutes those workers who directly process different materials manually or with the help of production machines. e.g. workers operating various production machines in machine shop, welding shop, electric winding shop, pattern making shop etc. come under the category of direct labour.
(ii) Indirect Labour:
Indirect labour constitutes those workers who are not directly involved in the manufacturing of product, but help the direct labour in performing their duties. e.g. foremen, supervisors, maintenance staff, inspection staff, crane driver etc.
Calculation of Direct Labour Cost:
For calculating the direct labour cost, the cost estimator must possess the knowledge of different machines; tools and operations involved in the manufacturing of the products. Cost estimator must consult the product department about correct estimated times for different operations. He should take into consideration the various allowances which are as follow:
(i) Set up time.
(ii) Operation time which consists of handling time and machining time.
(iii) Tear down time.
(iv) Miscellaneous allowances: (a) Process allowances, (b) Rest and personal allowance, (c) Special allowances etc.
3. Expenses:
All the expenses, except direct material cost and direct labour cost, which are incurred in the factory are called expenses. Even cost of indirect material and indirect labour is counted towards expenses. Expenses in a factory can be classified as follow:
(i) Direct expenses, (ii) Indirect expenses.
(i) Direct Expenses:
There are the expenses which are charged directly to a particular job. e.g. cost of hiring a special purpose machine, cost of special jigs and fixtures, cost of special patterns, cost of experimental work on a particular job etc.
(ii) Indirect Expenses:
These are the expenses which are not charged directly to a particular job. e.g. telephone bills, insurance, depreciation, advertisement expenses etc. These expenses are also known as overhead charges, on-cost, burden or indirect charges. These are further classified as follow:
(a) Factory expenses,
(b) Administrative expenses,
(c) Sales expenses,
(d) Distribution expenses,
(e) Research and development expenses.
(a) Factory Expenses:
These are indirect expenses incurred on the manufacturing of a product in the plant such as indirect materials and indirect labour.
(b) Administrative Expenses:
These are general administration expenses such as salaries of general and executive staff, telephone bills, depreciation etc.
(c) Sales Expenses:
These are the expenses incurred on selling the product such as salesmen expenses, advertisement expenses etc.
(d) Distribution Expenses:
These are the expenses made on holding the finished goods, despatching them to customers, packing cost etc.
(e) Research and Development Expenses:
These are the expenses made in research and development which improve the quality of the product.
COMPARISON OF ESTIMATING & COSTING:
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