Automotive Servicing Operations

Management
L-IV

Unit of Competence: -Prepare Job Estimation and Costing

Module Title: -Preparing Job Estimation and Costing

Prepare Job Estimation and Costing

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 What is an Estimate?
Costs of automotive work are classified as
1. Materials costs.
2. Labor costs.
3. Equipment costs.
4. Overhead (general and job) costs.
5. Profit.
 Data on all of these costs are required to develop orprepare an estimate.
What is the Purpose of Estimating?
The purpose of estimating is to forecast the cost required to complete a project in accordance
with the contract plans and specifications.
􀂉There are two distinct tasks in estimating:
􀂉To determine the probable real cost of the project.
􀂉To determine the probable real time to build the project.
􀂉Because automotive estimates are prepared before carryout is service, an estimate is, at best, a
close approximation of the actual costs
 The true value of the project will not be known until the project has been completed and
all costs have been recorded.
􀂉Therefore, the estimator m does not establish the cost of a project; he simply establishes the
amount which the contractor will receive for constructing the project
 It may be defined asthe process of determining the probable cost of the service /product
before the actualproduct/service starts.
 An estimate involves calculating the costs of work onthe basis of probabilities.
 Cost estimation is the process of determining anticipated or probable cost of a product
/service before its servicing/ producing undertake.
 It is process of determining the cost which is likely to be incurred on the service/product
of job before it is actually service/ product.
 Thus costestimation is concerned with the calculation of a probable cost of a service
productbefore the servicing/ producingstarts. It also includes the determination of the
quality &quantity of inputs like materials&labour (skill level needed) required etc.
 Estimating procedure requires technical knowledge about servicing/ producing
techniques &operation time etc

Two activities are involved when carrying out an estimate:

􀂉Measurements: all measurements are approximate.
􀂉 Pricing: the degree of approximation is even greater because of the difficulty in predicting all
the
Objective of cost estimating
1)Cost estimating enables the manufacturer to fix the selling price of a product well in advance
of actual production.
2) To prepare production /service budget.

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3) To determine the standard cost of the product which represent the best estimate that can be
made
Function of estimation
i) To work out labor cost after considering labour time involved with the help of prevailing wage
rates.
ii) To determinethe oftooling’s, equipment&accessories etc.to be procured from outside.
iii) To determine d/n overhead charges including packingtransportation, marking& selling etc.
iv) To determine the selling price of the service after considering profit to be realized.
v) To perform time &motion study
vii) To maintain the previous records of estimates in a systematic manner for future reference.
Organizations and prerequisites of estimation
 In large scale industrial units ,this department function separate.ly under the service
planning department ,but for small scale units ,there estimation work is generally
executed by service manager with the assistance of a qualified draftsman .the person who
works for the preparation of estimates is called estimator.
 An estimator of the estimation department must possess the following
Essentialcharacteristics or qualities.
i) He should be able to read &understand the blue print & drawing well.
ii) He must possess a good knowledge of various machines &operation, their timing etc .for the
service to be serviced or being serviced.
iii) He should possess sufficient knowledge regarding use of proper tooling, jigs &fixtures
iv) He should have a thorough knowledge regarding the availability market prices of various
input materials required in the service cycle.
v
What is the Role of the Estimator?
 The success of a estimator business depends on the accuracy of these estimates.
 Estimator lacking this experience mayover-or under-estimates his project/ service costs.
 The estimator’s success will be based on his previous
 Experience and knowledge of the automotive industry.
 The success of aestimates business depends on the accuracy of these estimates.
 The estimator’s job is to prepare estimates of service costs.

In either case, this could be detrimental to the success of his company:

􀂉If costs are too high, his jobs will be few and far between.
􀂉If costs are too low, he will not be able to stay in business.
􀂉All cost data is acquired from experience. If an estimator does not have cost data from his own
experience, he must use cost data from price books and handbooks
 The more valid data the estimator has available, the better he will be able to estimate the
probabilities of costs.
The following factors affect the accuracy of cost estimates:
1. Site, location and accessibility.
2. Subsurface and soil conditions.
3. Time and season.
4. Climatic conditions.
5. Wage agreements.
6. Strikes.

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7. Market prices of basic materials.
8. Availability of money.
9. The demand for construction.
What the Estimator Must Know?
He must have a thorough knowledge of the auto service trades.
e.g. This includes types of automotive service and methods of automotive service.
He must be able to read automotive service plans and notes, and understand the
specifications.
He finds any discrepancies between the plans and specifications, he will bring them to the
attention of the architect or owner for solution.
􀂉 When all the questions are answered and problems are solved, he can then prepare and
finish the cost estimate
He has to possess some basic mathematical ability.

The Components of an Estimate

Most estimates are made up of the following five parts:
1. Materials: The estimator makes a take-off of all the different materials required on theproject
from the plans and specifications.
2. Labor:The estimator estimates the hours needed to do the required work and thenmultiply by
the appropriate wage.
3. Equipment:The cost of equipment includes ownership or rental fees, moving to the jobsite,
erecting, dismantling and operating.
4. Overhead: There are two types of overheads:
4a. General overhead: includes all costs that cannot be directly charged to any particularproject,
such as the cost of office supplies, rent, travel expenses and salaries.
4b. Job overhead: includes all costs which apply directly to the project and cannotbe charged to
materials, labor, or equipment.
5. Profit: Most estimators show the profit expected from a job as a percentage of the
total estimated cost of the project. The profit varies from 6-15%.
Possible Sources of Errors in Estimates
1. Mistakes in material take-offs.
2. Errors in carrying forward material from quantity sheets to summary sheets and from there to
direct cost sheets.
3. Mistakes in estimating the labor time required forcertain items of work.
4. Errors in estimating hourly wages of labor.
5. Failure to allow for rising costs of materials.
6. Failure to allow for delays due to breakdown of machines and acts of God (e.g. earthquakes
and
7. Making no provisions to have estimates checked.
8. Insufficient allowance for overhead.
9. Omission of profit
Labour and its skill required
Like input materials labour required for service process may be of following two types:
 Direct labour
 Indirect labour
Direct labour:-is the labour directly employed in the service operation e.g. technician

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Indirect labour:-is the labour which help the service labour in performing its duties e.g.
maintenance men, material handling persons &store keepers etc.
Method of costing:-generally the following methods of costing are more commonly industries
&firm providing utility service:
Job order costing:-It is determining the cost of each individual job or contract. In this met each
job has to be planned &its cost determined separately on the basis of actual cost incurred.
Batch costing:-is a form ofjob costing with the difference that instead of costing each
component separately each batch of similar component is taken together &treated as a job.
Multiple cost method:-this method is utilized by firm which manufacture variety of
standardized products having no relation to one another in cost quality and the type of process
etc.such as cycles, type writesetc
Department costing:-A big industries like automobile, each department is producing
independently one or more component. Department costing method is used in such industries and
the actual expenditure of each department is separately calculated.
Service costing:-in the service rendered by business, operating costs are required to be
calculated e.g. transport service water work, electric power supply etc
Element cost:-in any industries organization the cost of service is calculated so as to make the
exact idea about the profit which can be earned.
Cost can be divided into three main costs as follows:
1) Material cost
2)Labourcost
3. Expenses
Material cost: it is of two types
Direct Material Cost
Indirect Material Cost
 Direct Material Cost: the cost of direct material includes the purchase price as well as
expenses such as freight, insurance, loading, and unloading.

 Indirect Material Cost:-are waste, sandpaper, coolant, lubricants, and grease etc.

Labour cost
Direct labour Cost:-consists of wages paid to the workers directly engaged in the
servicing/manufacturing. Worker engaged for operating on various production
/service machine in machine shop, engine service shop, auto electric shop, and
auto power train shopetc .are known as ‘’Direct labour’’
 Indirect labourCost:-any other labour, which help the productive/service labourin
performing their duties is called‘’Indirect labour’’.
Examples of indirect or non productive workers are; inspectors, supervisors,
foremen operator maintenance man and helpers.
Over-head /expenses
Over-head are the expenses which cannot be definitely charged to some particular or service
process .All the expenses other than direct costs such as direct material, direct labour&any other
direct expenses are known as over heads. These may include the expenses such as
Over-head /expenses:-a part from material &labour cost in each factory/enterprise there
are several other expenditures such as cost of advertisement depreciation charges plants

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 of and machinery, cost of transportation &cost of packing etc .which are known as
expenses.so it can be said that except direct materials and direct labour cost all other
expenditures which occur in an enterprise are called “Expenses’’
Expenses may be of two types
o Direct Expenses
o Indirect Expenses
DirectExpenses: - are those which can be charged directly to a particular job and incurred
for that specific job only .e.g. the cost of special jigs and fixtures and cost of special
pattern; cost of experimental work done specifically for a particular product. Consultancy
charges paid for manufacture of a specific product
.
Administrative Over head:-these include the wages of administrative staff working in
offices telephone, telegraph and postage charges etc.
Administrative Over headinclude expenses incurred on administrative section such as
salary and wages of clerk, office rent, legal expenses on this office,service after sale etc.

Sales &advertisement expenses are those incurred no -salesman, rent of sales office
and other expenses on this office, service after sale etc.
Distribution expenses /Over head: include all the expenses made on holding finished
stock and dispatching them to consumers e.g. cost of packing materials and wages of
worker employed for of products.

Distribution expenses /Over head are –warehouse charge, loading&un loadingcharge,

depreciation of vehicles (used fordistribution of good and salary of clerks and supervisor
employed for distribution etc.
 Manufacturing Over head: - All expenses (indirect) connected withmanufacturer of the
product. Such as shop inpectors, maintenancecrew, generalworkers, machinesetters,
foremen and supervisor plus shop clerk (if he is in a shop i.e.he is not in the
administrative section), water for plant, electricity etc.
Selling expenses: relate to the expenditures of marketing the product like advertising
andpublicity costs and travelling expenses of sales reprentatives etc.
Depreciation and insurance charges of buildings, plants, furniture and equipment
etc.other expenses if any is also added in over head expenses
Fixed and variable overheads/expenses
 Fixed overheads:-These are the costs that tend to remain relatively constant whatever
may be the volume of production /service.
Example:-of fixed expenses is interest on capital invested, rent & insurance of building etc.
Variable overheads: - These are those indirect expenses which tend to vary with the
volume of production /service. Examples: -royaltiespaid onvolume basis.
Distribution in proportion to Prime cost
According to this method, the rate of overhead equal the total overhead cost of the enterprise
expressed as a fraction of the prime costs .thus we get,
Rate of overhead = Total overhead costs
Total prime cost
.
Percent Directlabour Cost

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According to this method, the rate of overhead equal the total overhead cost of the enterprise
expressed as a fraction of the direct labour costs. Thus we have:

PercentRate =Total overhead costs×100

Total direct labour costs
Percent of directmaterial Cost.according to this principle

The Percent Rate = Total overhead costs ×100

Total direct material cost
N.B= Percent overhead rate ×D1
D1=Direct cost of product P1 (of oneproduct only)

Man-hour Rate
According to this method considers labour or man hour for findingoverheadcosts. So it is more
accurate that direct labourcost.
Rate of overhead = Total overhead cost(for budget period)
Total directlabourhours
Machine-hour Rate
In thismethod, machine –hour engaged for production only is considered (on labour, or
material costs are recognized.

Rate of overhead = Total overhead cost (for budget period)

Totalmachinehours

Production unit method.

Overheadrateperunitcosts (of product)=Total overhead costs
Total unit produced

Production estimate sheet

1. Prepare a list of all components/parts of the product along with detailed specifications.
2. Take /make any buy decision i.e. which component will be manufactured in the concern itself
and which parts will be procured form the market.

Relationship between element of costs and determination of selling price

1. Prime cost2. Factory cost
3. Office cost4. Total cost

The various components of cost are:-

Selling price we shall relate all costs now----
1. Prime cost:-It is also called as direct consists of direct material cost, direct labour cost and
direct expenses.
Prime cost= Direct Material Cost + Direct labourcost +Other Direct expenses /overhead.

2. Factory cost: It is also known as works cost and consists of prime cost and factory expenses

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a. Factory cost: prime cost +factory expenses/ overhead.
b.Manufacturing cost (or Factory cost) = Prime cost+ works overhead (factory overhead)

3. Office cost:-It consists of office cost and administrative expenses

I.e. Office cost = Factory cost + administrative expenses/overhead.

Office cost is also known as manufacturing cost or cost production.

4. Total cost: It includes office cost and selling and distribution charges.

5. Selling price: If the profit of factory is added in the total cost of a product it is known as
selling price. So the customers get the item /article by paying the price which is called as selling
price.
Sellingprice or marketing price =Unit cost (production cost +Profit
6. Factory overhead= indirect Material + indirectlabour+otherindirect expenses [All in the
factory

7. Establishment cost =Office administration + Distribution and advertisement

Problem1: Product has an yearly production output 10,000uints.Various associated costs are as
follows:
i) Cost of raw material including transportation charges ----- =Rs. 14000
ii) Wages of direct labour-------------------------------------------- =Rs.30, 000
iii) Wages of supervisory staff-------------------------------------- =Rs.5000
iv) Expenditure on marking and advertising purposes ------------ =Rs.10, 000
v) Expenses on administrative staff--------------------------------- =Rs.5000
vi) Cost of tool, jigs and fixtures--------------------------------------=Rs.1000
Find:-A. Prime cost
B.Manufacturing cost
C.selling price if 10% is the profit rate on Manufacturing cost
Calculate:

Problem3: for an industrial enterprise the following expenses were made with in a financial
year
Birr
i) Material purchased ---------------------------------------- 200,000.00
ii) Material in inventory store -------------------------------- 50,000.00
iii) Wages to direct labour------------------------------------- 70,000.00
iv) Wages to technicians and grinder men-------------------- 10,000.00
v) Repair and maintenance expenses ------------------------- 5000.00
vi) Printing and stationary charges----------------------------- 1000.00
vii) Postage and telephone expenses--------------------------- 500.00
viii) T.A&D.A.For sales and marketing staff ---------------------------- 3000.00

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ix) Rent paid for plant building ------------------------------------ 4000.00
x) Depreciation cost of plant ------------------------------------- 6000.00
xi) Cost of samples and expenses of advertising -------------10000.00
xii) Electricity and water charges----------------------------------2000.00
xiii) Rent of offices -------------------------------------------------500.00
xiv) Air conditioning charges ----------------------------------------1000.00
xv) Salary of office staff----------------------------------------------4000.00
xvi) Maintenance charges of show rooms --------------------------3000.00
xvii) Material unutilized-----------------------------------------------30000.00
Calculate the following:
a. Prime cost
B.Factory cost
C. production cost
D.Selling price to earn 15% profit.

Problem1: Product has an yearly production output 10,000uints.Various associated costs are as
follows:
i) Cost of raw material including transportation charges ----- =Rs. 14000
ii) Wages of direct labour-------------------------------------------- =Rs.30, 000
iii) Wages of supervisory staff-------------------------------------- =Rs.5000
iv) Expenditure on marking and advertising purposes ------------ =Rs.10, 000
v) Expenses on administrative staff--------------------------------- =Rs.5000
vi) Cost of tool, jigs and fixtures--------------------------------------=Rs.1000
Find:-A.Prime cost
B.Manufacturing cost
C.selling price if 10% is the profit rate on Manufacturing cost
Calculate:
Solution: now
i) Prime cost= Direct Material Cost + Direct labour cost+ other Direct expense/overhead.
Direct labour cost =Birr.30, 000
Direct Material Cost =Birr. 14000
Other Direct expenses =Birr. 1000
Total =30, 000+14000+1000=45000
Prime cost per unit =45000 Birr 4.50Ans
10000
Manufacturing cost /unit=Prime cost Works overhead
No of production
=45000+5000Birr4.50Ans
1000

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Selling price=production cost + profit
=Manufacturing cost+Estabishmentcost +profit
=50000+ (Rs10000+Rs 5000) +10%0f 50,000

= 65000+Rs5000=70000for 10000unit of product

Thus selling price of each product
= Birr.70000Birr7.00 Ans
10000

Problem2: Product has an yearly production output 20,000uints.Various associated costs are as
follows:
i) Cost of raw material including transportation charges --------- =Birr. 55000
ii) Wages of direct labour---------------------------------------------- =Birr.40, 000
iii) Wages of supervisory staff--------------------------------------- =Birr.6000
iv) Expenditure on marking and advertising purposes------------ =Birr.60, 000
v) Expenses on administrative staff----------------------------------- =Birr.8000
vi) Cost of tool, jigs and fixtures--------------------------------------=Birr.2000
Calculate:
a. Prime cost
b.Manufacturing cost
C.selling price if 30% is the profit rate on Manufacturing cost
Problem3: foran industrial enterprise the following expenses were made with in a financial
year
Birr
i) Material purchased---------------------------------------- 200,000.00
ii) Material in inventory store -------------------------------- 50,000.00
iii) Wages to direct labour------------------------------------- 70,000.00
iv) Wages to technicians and grinder men-------------------- 10,000.00
v) Repair and maintenance expenses ------------------------- 5000.00
vi) Printing and stationary charges----------------------------- 1000.00
vii) Postage and telephone expenses--------------------------- 500.00
viii) For sales and marketing staff ----------------------------3000.00
ix) Rent paid for plant building ------------------------------------ 4000.00
x) Depreciation cost of plant -------------------------------------6000.00
xi) Cost of samples and expenses of advertising -------------10000.00
xii) Electricity and water charges----------------------------------2000.00
xiii) Rent of offices -------------------------------------------------500.00
xiv) Air conditioning charges ----------------------------------------1000.00
xv) Salary of office staff----------------------------------------------4000.00
xvi) Maintenance charges of show rooms --------------------------3000.00
xvii) Material unutilized-----------------------------------------------30000.00
Calculate the following:
a. Prime cost
B.Factory cost
C. production cost
D.Selling price to earn 15% profit.

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Calculate:
Solution: now

Prime cost= Direct Material Cost + Direct labourcost+other Direct expenses.

= [(i) + (ii)-(xvii)] + (iii) =200,000+50,000-30,000] +70,000

= Birr 290,000

B. Factory cost:
=prime cost +factory expenses/ overhead
= prime cost+ [(iv) + (v) + (ix) +(x) + (xiv)]
=Rs.290000+10000+5000+4000+6000+1000
=Birr.316000Ans
C. production cost
=production cost +Establishmentcost (vi+vii+viii+xi+xii+xiii+xv+xvi)
316000+1000+500+3000+10000+2000+500+4000+3000
TOTAL = Birr.340000
D.Selling price = production cost + profiti.e. 15% ofP.C.
= 34000015 X340000
100
= 340000+51000
= Birr.391000
Problem4:A manufacturer of hand drill sells a drill for Rs 2000 .The various annual expenses
are as follows:
Material cost =Rs. 50000
Labour cost =Rs.25000
Cost of motor for each drill =Rs.1000
The factoryover head =40 % of prime cost
Total office expenses =10%Factory cost
Calculate the profit on each drill if annual production is 5000 units
Solution: now
Prime cost =Rs. [50000+25000+1000×5000]
=Rs.5075000

Factory over head cost=0.40 ×5075000=2030000

Factory cost =prime cost +factory overhead cost
=5075000+2030000
=7105000
Also establishment overhead =10% of factory cost
=0.1×7105000
=710500
So production cost =prime cost + Establishment overhead cost
=7105000 +710500
= 7815500
Unit production cost = 7815500 Rs. 1563

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 5000
Profit/unit =selling price – unitproduction cost t
= 2000-1563
=Rs. 437 Ans

Problem5:
The list price of a machine is Rs.6000 and the distributer is allowed 20%discount. The marketing
and administrative expenditure is 50% of factory cost and the material cost, labour cost and
factoryoverheads are in ratio1:3:2. if the cost of labour on the manufacture of the machine
Rs.1200 determine the profit on each machine.
Solution:List price of each machine= Rs. 6000
Selling price of each machine to distributors =6000×0.8=Rs 4800
Also it is give
Direct material cost: direct labour cost: factory overhead
1:3:2.and the direct labour cost =Rs1200
Therefore direct material cost
=1200×1=Rs400
3
Factory overheads =1200×2 =Rs800
3
Factory cost =prim cost+Factory overheads
=400+1200+800=2400

Total cost of each machine= Factory cost Administrative+ marketingexpenditure

=2400+0.5×2400=Rs.3600

Therefore profiton each machine =Rs.4800-Rs.3600

=Rs.1200Ans
Problem6: A company manufactures mobile phones. The monthly expenditure are as follows:
Direct material cost=Rs.10000
Direct labour cost=Rs.1500
Factory overheads=10% ofprime cost
Other overheads=10% ofwork cost
Profit =20% of total cost
Number of unit produced per month =20

Find estimate the unit selling price

Solution: Prim cost =10000+1500

=Rs.11500
Factory overheads =0.1×11500=1150
Factorycost =Prim cost+Factory overheads
=11500+1150=Rs.12650
Other overheads =0.1×12650=1265
Total cost =12650+1265
=Rs.13915

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Profit =20 ×13915=Rs2783
100
Total Selling price for20Unit 13915+2783=Rs.16698
Unit Selling price of phone 16698 =Rs.834.90 Ans.

Problem7:A smallscale industry is manufacturing 100 pens/day .the direct material is found to
be Rs anddirect material cost Rs.200.The Factory overheads chargeable to it Rs.250. The cost of
sales and marketing is 40% of theFactorycost .What should be the selling price of each pen to
earn a profit of 14.6 % of the selling price?
Solution:
No of pens manufactured per day------------- =100
Direct material cost --------------------------- =Rs.160
Direct labour cost --------------------=Rs 200
Factory overheads charges------------------------ =Rs250
Selling&marketing expenses ------------------- =40%Factorycost
Profit --------------------------------------------------- = 14.6% ofSelling price
Let S be theSelling price of 100 pens.
Profit on 100 pens------------------------ = 14.6×S
100
Total cost ------------------------------------=Selling price- Profit

= S- 14.6×S
100
Also Factorycost-------------------- =material cost+labourcost +overheads
=160+200+250=Rs.610
610+610×40=610+244=Rs.854
Total cost=100

Therefore 854 = S- 14.6×S

100
=Rs.1000
Or
=Rs.1000
Hence selling price of each pens 100

=Rs.10 Ans

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