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

Conversion Cost

Cost Summary

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:

• What is the function?

• What does it cost?

• What else can perform the function?

• 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