Cost modeling is the pre- calculation of production costs. Pricing, bidding, buy-buy decisions, and investment evaluation are all based on this calculation.
Components of cost
Component
Source
Computational logic
Direct material
Product tree × material price
By including fire rates, the cost of lower levels is increased.
Direct labor
Route labor time × labor hourly rate
Preparation and processing times are calculated separately.
Machine cost
Route machine time × machine hourly rate
Depreciation, energy, and maintenance are spread over machine hours.
Installation cost
Preparation time × resource cost
Divided by batch size and reflected in unit cost.
Subcontracting cost
External operation price
Including transportation and waste.
General production expenses
Cost center expenses
With activity rate or activity-based distribution key
Energy
Equipment consumption × unit energy price
Monitoring them as separate components is becoming increasingly common.
Scope
Multi-level cost accounting: Calculating and allocating the cost of all levels, from raw materials to the final product, sequentially.
Establishing standard cost: At the beginning of the period, determining the standard cost with current prices and terms and using it as a reference for inventory valuation.
Cost versions: Separate versions of the plan, standard, simulation, and actual cost are kept and can be compared.
What would happen analysis: Testing how costs would be affected if raw material prices, exchange rates, energy prices, labor costs, or batch size changed.
Alternative comparison: Comparing the cost of different recipes, different facilities, different production methods, or outsourcing options.
Cost estimation: Generating a preliminary cost estimate for a new product that does not yet have a product tree, based on similar products or a prototype.
Cost decomposition: The ability to break down the final cost into its components; to see how much of the cost is accounted for by each raw material or each operation.
Price-cost relationship: Comparing the sales price with the cost and calculating the markup on a product basis.
Cost modeling in an inflationary environment.
In a rapidly changing price environment, a standard cost fixed at the beginning of a period becomes detached from reality within a few months. In this situation, three practices become critical:
1. Frequent updates: The standard cost is updated at shorter intervals, not just annually. 2. Real-time simulation: The cost can be recalculated with current prices at the time of the offer. 3. Sensitivity analysis: Identifying which cost item has the greatest impact on the total cost; thus determining which price changes need to be monitored.
Offers made without these three elements may carry risks the moment they are signed.