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:
- 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
