ESTIMATING, COSTING

& CONTRACTING
(3351905)

Subject In charge – Hardik Rathod

Mechanical Engineering Dept.
CHAPTER – 1
INTRODUCTION
NEED OF COSTING
 Change in design if production cost is high.
 To keep control wages of workers.

 To fix selling price of the product.

 To get help in preparation of financial statement.

 To get help in formulation of operating policies.

 To detect wastage.
SCOPE OF COSTING
 Eliminate unproductive wastage.
 Check wastage and inefficiency.

 Estimate cost of the product.

 Fix the selling price.

 Carryout comparative study of cost.

 Prepare financial statement.

 Facilitate decision making.

 Provide periodical data of profit and loss account.

IMPORTANCE OF COSTING

 To determine the cost of each article.

 To determine the selling price to be quoted to the
customers.
 To help the management in decision-making.
 It suggests changes in design, when the cost is
higher.
 Cost control through accumulation & utilization
of cost data.
 It provides standard costing.
ADVANTAGES OF COST ACCOUNTING
 Quantity of material required and sequence of
operations needed for a job.
 Locating wastage and spoilage of material.

 Information about profitable and unprofitable

activities.
 Deciding the efficiency of the worker.
 Deciding whether part to be manufactured or
purchased from market.
 Compare actual cost and estimated cost.
NEED OF ESTIMATING
 To help factory owner in deciding the
manufacturing and selling policies.
 To help in filling up tender enquiries.

 To compare and checking the actual overheads of

the factory.
 To decide about the wage rates of the workers
after making “Time Study”.
 It helps in decision-making
 FACTOR INVOLVED IN ESTIMATING
 Design time
 Amount of material required

 Cost of material required

 Production time required

 Labour charges

 Cost of machinery, overheads and other expenses

 Use of previous estimates of comparable parts & products.

 Cost of Experimental work

 Effect of volume of production on costing rates

 Cost of design & arrangement of special items

COST ESTIMATING PROCESS
 Preparation of part list of a product.
 To take make or buy decision for each part.

 To calculate the weight of materials considering each

allowances.
 Determine the material cost considering the market
price of the material.
 Estimate the cost of parts to be purchased from market.

 Estimate labour cost based on no. of operations, time

taken for each operation and for testing and
assembling.
 Estimate cost of machine tools & equipments.
 Determine the prime cost after adding direct expenses,
material cost & labour cost.
 Determine the factory overheads including depreciation
& expenditure on maintenance of the plant, insurance etc.
 Determine administrative overheads.

 Determine the packing & delivery charges.

 Then calculate total cost.

 Decide desire profit & add in the total cost and fix up the
sale price.
 Decide the discount allowed to distributor.
QUALITIES OF AN ESTIMATOR
 Read and understand drawings and blue prints well.
 Good knowledge of different machines, their
operations and timings of manufacturing product.
 Knowledge of the use of proper tools, jigs and
fixtures etc.
 Knowledge of market price of different materials.
 Knowledge about wage rates of all types of workers.
 Knowledge about different allowances of time.
 Knowledge about cutting speeds, feeds and depth of
cuts for different materials, operations and tools.
 Well qualified and trained technical person.
IMPORTANT FUNCTION OF ESTIMATOR
 To determine material cost considering different allowance of
all manufacturing operations.
 To determine labour cost including labour time and wage
rates.
 The cost of material, tools, equipment etc. to be purchase
from outside.
 To determine different overhead charges including selling,
packing & transportation charges.
 To determine selling price after adding desire profit.

 To conduct time & motion study and also determine

manufacturing time.
 To keep the previous records for future references.
 DIFFERENCE BETWEEN ESTIMATING & COSTING

 Estimating is aimed to calculate the  Costing is the determination of

probable cost of the product or actual cost of the product by adding
work before the manufacturing various elements of expenses
starts. incurred.
 Estimating requires a highly
technical knowledge hence an  Costing requires the knowledge of
estimator is an engineer. accounts and hence costing is done
 Estimating forecasts the probable by accountants.
cost & hence one can know before  Costing tells profitability of the
the manufacture that the product after the manufacturing the
manufacturing product shall be product.
profitable or not. And whether one
should manufacture it or not.
 Estimating gives us an idea about  Costing tells us the actual cost of a
expected or probable cost of a
product.
product.
MATERIAL COST
Direct Material Cost:
 This is the cost of the material on which, the processes or operations
are done to achieve the final shape of the main product. E.g.
1. The cost of wood for making the furniture.

2. The cost of material (Aluminium, C.S., etc.) for manufacturing any

component (Piston, Cylinder, Connecting Rod, etc.)

Indirect Material Cost:

 This is the cost of the material, which is not the part of the main
product but it is needed in various shops to manufacture the final
product. E.g.
1. The cost of the coolant, fuel. 

2. The cost of grease, lubricating oil, etc.

3. The cost of kerosene oil, cotton waste, etc.

 LABOUR COST
Direct Labour Cost:
 The worker, who actually work or process different materials
manually or with the aid of machines is known as ‘Direct Labour
Cost’. E.g.
1. The wages of turner, welder, milling operator, etc.

1. The wages of pattern maker, molder, painter, assembly worker, etc.

Indirect Labour Cost:

 Any other labour, who helps the productive labour in performing their
duties is known as Indirect Labour. Their wages can not be charged
directly to a particular job but are charged on the total number of
products produced in the plant during a particular period. E.g.
1. The wages of supervisors, inspectors, store keepers, crane driver,
etc.
2. The wages of securities, gate keepers, helpers, etc.
CLASSIFICATION OF OVERHEAD EXPENSES
Factory Overheads:
 It cover all indirect expenses incurred by factory right from the receipt
work order till it is completed and ready for dispatch to the stores.
 It is also known as factory on costs or work on-costs.

a. Expense incurred on indirect materials likes lubrication oil, coolants,

cotton waste etc.
b. Expense incurred on indirect labour e.g. salary of work manager,
foremen, supervisor etc.
 
Administrative Overheads:
 It covers all indirect expenses on the direction, control and
administration for efficient and proper functioning of industry.
 Expenses incurred on the salaries of general office staff & executive
staff, telegraph, fax, computer & telephone charges, depreciation of
office building and equipment etc. 
Selling Overheads:
 It covers all indirect expenses incurred in the sales and estimating
departments.
 Expenses incurred on the salaries of sales manager, clerk, advertising
expenses and agency expenses etc.
 
Distribution Overheads:
 These overheads include all the expenses made on holding finished
stock, dispatching them to the customer, packing cost etc.
 
Miscellaneous Overheads:
 These overheads include all the expenses made on visit to the factory
by VIPs & Guests, donation to various organization, national holidays
and Jubilee celebration etc.
TYPES OF DEPRECIATION
Depreciation due to wear & tear:
 In spite of proper maintenance and sufficient precaution wear and tear
occurs in moving parts of any machine and equipments which cause
replacement cost of machine.
 
Depreciation due to physical decay:
 In spite of sufficient or all the efforts, certain items like raw material,
furniture, chemicals etc. decay with passage of time due to atmospheric
effects cause reduction in the value of these items.

Depreciation due to accident:

 Although the machine might be installed few days back and also take
proper care to prevent accident but it may occur due to wrong operation
or loose parts or any other reason.
Depreciation due to differed maintenance:
 Every manufacturer supplies certain instruction for smooth and
efficient running of the machine. If these instruction are not
properly followed then the value of machine may be reduce.
Depreciation due to obsolescence:
 Due to inventions and advancements in the machinery, new
machines have higher rate of production, the old machine
become obsolete though it’s efficient functioning and good
condition.
Depreciation due to inadequacy:
 Sometimes the machine or equipment is not capable of meeting
out the increased demands of industry, though it is efficient in
functioning. This is called inadequacy of machine to cope up
with demand.
 METHODS OF CALCULATING
DEPRECIATION
A. Straight Line Method
B. Sinking Fund Method
C. Machine Hour Rate Method
D. Annuity Method
E. Sum of Years Digits Method
F. Insurance Policy Method
Market value:
 The asset or product is offered for sale by the manufacturer or
distributor at a certain price, if the purchaser is ready to purchase
it at the same price.
Book value:
 The value of building & machine calculated after deducting the
depreciation at a particular time, during its service life.
Scrap value:
 The value of machine & equipment calculated after deducting
depreciation at the end of their service life. This is the value at
which they can be sold as scrap.
Salvage value:
 The condition of the asset sold is such that they can be future
used for certain period of time. Hence the sale price of
serviceable machine realized by their sale is called its salvage
value.
 CHAPTER – 3
COST ESTIMATING IN
WELDING
ELEMENTS OF COST IN WELDING

1. Material Cost.
2. Labour Cost.
3. Overheads.
MATERIAL COST:
 Metallic sheet or plate stock, Casting, Stamping,
Forgings etc.
 In case of gas cutting and welding, cost of gases
like acetylene and oxygen.
 Consumable electrode or weld wire.
 Cost of purchase parts like nut-bolt, rivet, etc.
 Cost of paints, coating.
 Material wastage, filler rod & electrode.
 Packing material.
LABOUR COST:

1. Preparation cost.
2. Set up cost.
3. Material deposition cost.
4. Post welding operation cost.
5. Mechanical type post welding operation cost.
6. Finishing cost.
7. Tooling cost.
FACTORS AFFECTING WELDING COST
 Time required for cleaning the plates.
 Time required for holding the job in the fixtures.

 Cost of base plate.

 Cost of welding electrodes.

 Labour charges.

 Direct expenses.

 Indirect expenses.
 Cost of power consumed.

 Welding time.
PROCEDURE FOR ARC WELDING

1. Cost of Welding electrode:

Electrode consumption =
rate of consumption of electrode per meter welding x Total
length of welding

Cost of Electrode =
Electrode consumption in meter x Cost of electrode
2. Labour cost:

Welding Time = Welding Length per meter

Welding Speed in m/hr

Actual Welding Time = Welding Length per meter

Welding Speed in m/hr x Operating factor

Labour cost =
Actual welding time in hr x Labour rate Rs./hr
3. Power cost:

Power Consumption (kwh) = V x I x welding time

E / 100 x 1000

Power cost (Rs.) = Power consumption x Power rate

Power Consumption (kwh) =

Length of weld x Power consumption per m. of welding