13.1 Cost estimation: How much does this particular design cost?

Question 1

How are costs often categorized?

Answer 1

Costs are often broken up into:

• Labor costs
• Material costs
• Overhead costs

Question 2

What are included in labor costs?

Answer 2

Labor costs include payments to:

• the employees who build the designed device
• support personnel who perform necessary but often invisible tasks
  
  • taking orders
  • filling orders
  • packaging
  • shipping the device

Question 3

What are indirect labor costs?

Answer 3

Indirect costs that are less evident costs that are generally not paid directly to employees. These indirect costs are sometimes called fringe benefits.

Question 4

What do fringe benefits include?

Answer 4

Fringe benefits include:

• insurance
  
  • health
  • life
• retirement benefits
• employers’ contributions to Social Security
• other mandated payroll taxes

Question 5

What is the typical upper limit on indirect labor costs?

Answer 5

Indirect costs of labor are crucial to recognize when we are estimating the cost of a design, because in many companies they are as much as 50% of direct labor payments or wages.

Question 6

What is included in material costs?

Answer 6

Material costs include:

• items and inputs directly used in building the device
• intermediate materials and inventories that are consumed in the manufacturing process

Question 7

What is a key tool for estimating the materials cost of an artifact?

Answer 7

A key tool for estimating the materials cost of an artifact is the bill of materials (BOM).

Question 8

What is a bill of materials (BOM)?

Answer 8

A bill of materials is the list of all of the parts in our design, including the quantities of each part required for complete assembly.

Question 9

What is overhead cost?

Answer 9

Overhead cost includes all of the costs incurred by a manufacturer that cannot be directly assigned to a single product.

Question 10

Explain overhead cost via example situation.

Answer 10

If, for example, a company makes a product in a factory that also produces 20 other products, the cost of the building, the machines, the janitorial staff, the electricity, and so on, must somehow be shared or distributed among all of the 21 items.

If the company ignored these overhead costs in setting its product’s prices, it would soon find itself unable to pay for the building and the services necessary to maintain it.

Question 11

What is included in overhead costs?

Answer 11

Overhead costs include

• the costs of entities that are distributed over the costs of several products
• the salaries of executives
  
  • who are presumably using some share of their time to supervise each of the company’s activities
• costs of needed business functions such as:
  
  • accounting
  • billing
  • advertising

Question 12

What elements of business are subject to economies of scale?

Answer 12

Both labor and materials are subject to economies of

scale

Question 13

How can we minimize the unit production cost of a design?

Answer 13

We can reduce the unit production cost of a design by making a lot of copies, rather than just making a few “originals”.

Question 14

What enables companies to distribute the costs of specialized and innovative technologies over a lot of units? How does this affect cost?

Answer 14

High volume production allows companies to distribute the costs of specialized and innovative technologies over a lot of units, thus lowering the cost per unit produced.

Question 15

What costs are distinctly different?

Answer 15

There is an important distinction between the cost of designing, prototyping, and testing a product and the cost of the product after manufacturing and distribution.