Transcript Slayt 1

FOOD ENGINEERING
DESIGN AND
ECONOMICS
CHAPTER III
COST ESTIMATION
COST ESTIMATION



For a successful plant design, the process should be capable of
operating under conditions which will yield a profit. Since net profit is
the difference between total income minus all expenses, it is
essential that an engineer should be aware of the many types of
costs involved in manufacturing processes.
Capital must be allocated for direct plant expenses (as raw materials,
labor, equipment …) or for indirect expenses (administrative salaries,
product distribution costs, cost for communication ….).
A capital investment is required for any industrial process and
determination of the necessary investment is an important part of the
design project. The total investment for any process consists of fixed
capital investment for physical equipment and facilities in the plant
and working capital which must be available to pay salaries, keep
raw materials and products on and and handle other special items
requiring a direct cash outlay.
•loans
•common stock
•bonds
•other capital inputs
net cash flow from the project
•other
investments
•repayment of
borrowed capital
•stockholders
dividends
Capital source
and sink
Manufacturing Fixed
Capital
Investment
Manufacturing Fixed
Capital
Total capital
investment
Investment
Working capital
investment
total income
from sales
Operations for
complete project
costs for operations
depreciation
income
taxes
net profit after taxes
Cash flow for industrial operations



In the figure, total capital investment is shown as the trunk of a
tree . The roots are fed by capital sink. Input to capital sink can
be in the form of loans, stock issues, bond releases and other
funding sources including the net cash flow returned to the
capital sink from each project. Output from the capital source is
in the form of total capital investments for each of the company’s
industrial operations, dividends to stock holders, repayment of
debts and other investments.
The total capital investment includes all the funds necessary to
get the project underway. This encompasses the regular
manufacturing fixed capital investment and the working capital
investment along with the investment required for all necessary
auxiliaries and non manufacturing facilities.
“operations for complete project” represents the overall
operations for the complete project with working capital funds
moving in and out as needed but not maintaining a constant fund
as available working capital.


Depreciation charges are to allow eventual
replacement of the equipment and, therefore,
paid back to company capital sink. These
charges are not included in the costs for
operation. Depreciation must be recognized as a
cost before income tax charges are made and
before the net profits are reported to the stock
holders.
The difference between income and operating
costs represents gross profits before
depreciation. After depreciation charges, net
profit is taxable. The remainder is clear profit
which can be returned to the capital sink along
with the depreciation charges to be used for;
new investments, dividends or repayment of
present investment.
Land, salvage
Cash
position
Working capital
recovery
(dollars)
Cumulative cash
position
start of
construction
Time (years)
land
Fixed capital
investment
Working capital
investment
construction
period
0 1 2 3 4 5 6 7 8 9 10
Cumulative cash position






The time period chosen is the estimated life period of the project
and time value of money is neglected.
The zero point on the abscissa represents the time at which the
plant has been completely constructed and is ready for operation.
The total capital investment at the zero point in time includes land
value, fixed capital and auxiliaries investment and working capital.
(i.e., cash position is negative)
Cash flow to the company in the form of net profits starts to
accumulate and gradually pays off the full capital investment.
After that time, profits accumulate on the positive side of the
cumulative cash position until the end of the project life. At that
time the project is theoretically shut down and the operation
ceases.
After shut down working capital is still available and it is assumed
that land can be sold at its original value.
The final result on cumulative cash position is a net profit over the
total life of the project.
Factors Affecting Investment and
Production Costs
When a design engineer determines costs for any
type of commercial process, these costs should be
of sufficient accuracy to provide reliable decisions.
To accomplish this, the engineer must have a
complete understanding of the many factors that
can affect costs.
1.
2.
3.
4.
5.
sources of equipment
price fluctuations
company policies
governmental policies
operating time and rate of production
1.
Sources of Equipment
One of the major costs involved in any industrial process
is for the equipment. In many cases standard
equipments are used and a substantial reduction in cost
can be made by employing idle equipment or by
purchasing second-hand equipment.
If new equipment must be bought, several independent
quotations should be obtained from different
manufacturers. When the specifications are given to the
manufacturers, the chance for low cost estimate is
increased when engineer does not place strict limitations
on the design.
2. Price Fluctuations
In the modern competitive economies, prices may vary widely
from one period to another and this factor must be considered
when the costs for industrial processes are determined.
The cost for equipments, salaries and working capital required
are to be compared with market values.
3. Company Policies
Policies of individual companies have a direct effect on costs.
Some concerns have particularly strict safety regulations and
these must be met in every detail.
Accounting procedures and methods for determining
depreciation costs vary among different companies.
The company policies with respect to labor unions should be
considered, because these will affect overtime labor charges
and the type of work the operators or other employees can
do. Labor union policies may even dictate the amount material
and type of material for the equipments, thus have a direct
effect on the total cost.
4. Governmental Policies
The national government has many regulations and
restrictions which have a direct effect on industrial costs.
Some examples are import and export regulations, restrictions
on permissible depreciation rates, value added tax (VAT,
(KDV)), ? (ÖTV), income tax rules and environmental
regulations.
Governmental policies with reference to caital gains and
gross-earning taxes should be clearly understood when the
costs are determined.
Each company has its own methods for meeting the
regulations, but changes in the laws and alterations in the
national and companies economic situation require constant
surveillance if optimum cost conditions are to be maintained.
5. Operating time and rate of production
One of the factors that has an important effect on the costs
is the fraction of the total available time during which the
process is in operation. When equipment stands idle for an
extended period of time, the labor costs are usually low;
however, other costs, such as those for maintenance,
protection and depreciation, continue even though the
equipment is not in active use.
Operating time, rate of production and sales demand are
closely interrelated. The ideal plant should operate under a
time schedule which gives the maximum production rate
while maintaining economic operating methods. In this
way, the total cost per unit of production is kept near a
minimum because the fixed costs are utilized to the fullest
extend. This ideal method of operation is based on the
assumption that the sales demand is sufficient to absorb all
the material produced. If the production capacity of the
process is greater than the sales demand, the operation
can be carried on at reduced capacity or periodically at full
capacity.
Amount per month ($)
Total income
Total production
Break-even
cost
point
Fixed costs
Rate of production (amount/month)


In the figure, a graphical analysis of the effect on
costs and profits are shown when the rate of
production varies. As indicated in the figure, the
fixed costs remain constant and the total
production cost increases as the rate of
production increases. The point where the total
product cost equals the total income is known ad
the “break-even point”.
The effects of production rate and operating time
on costs should be recognized. By considering
sales demand along with the capacity and
operating characteristics of the equipment, the
engineer can recommend the production rate and
operating schedules that will give the best
economic results.

For the production total cost is the summation of fixed cost and
variable cost;
CT= CV + CF
The variable cost is a function of production rate R,
CV= gV .R
where gV is the unit variable cost.
Income from sales is a function of production;
IT= fS .R
where fS is the unit selling price.
at break-even point, total cost and total income are equal;
CT= CV + CF = IT
gV. RBEP + CF = fS .RBEP
CF
RBEP 
f s  gv
Example: An industrial operation is working with 70 % capacity. The
annual variable production cost is 140 000 $. Total annual fixed cost
is 100 000 $. If the unit selling price of the product is 20 $ and with
this capacity total annual gain is 280 000 $ what will be the
production rate at “break-even point”. If the plant is operated with
100% capacity what will be the gross profit and net profit. For this
example tax rate can be taken as 37% over gross profit.
RBEP 
CF
f s  gv
2 8 0 0 0 0$
2 0 $ /un it
1 4 0 0 0 0$
gv 
 1 0 $ /un it
1 4 0 0 0un it
1 0 0 0 0 0($ /y ear)
RBEP 
 1 0 0 0 0un it s/y ear
2 0 - 1 0 ($ /un it )
I T  f s .R , R 
With 100 % capacity, capacity=14 000 (1/0.7)=20 000 units/year
This means break even point is reached at 50 % capacity. At this capacity
total earnings=20 000 (20)= 400 000 $
total costs= 100 000 + 20 000 (10) = 300 000 $
Gross profit = 400 000- 300 000 = 100 000 $
Net profit = 100 000 (1-0.37) = 63 000 $
Capital Investments


Before an industrial plant can be put into operation, a
large sum of money must be supplied to purchase and
install the necessary machinery and equipment. Land and
service facilities must be obtained and the plant must be
erected complete with all piping, controls and services. In
addition, it is necessary to have money available for the
payment of expenses involved in the plant operation.
The capital needed to supply the necessary manufacturing
and plant facilities is called the fixed capital investment,
while that necessary for the operation of the plant is
termed the working capital. The sum of the fixed capital
investment and the working capital is known as the total
capital investment.

Fixed Capital Investment
Manufacturing fixed-capital investment represents the capital
necessary for the installed process equipment with auxiliaries
that are needed for complete process operation. Expenses for
piping, instruments, insulation, foundations and site preparation
are typical examples of costs included in the manufacturing
fixed-capital investment.
Fixed capital required for construction overhead and for all plant
components that are not directly related to the process operation
are designated as the non- manufacturing fixed capital
investment. These plant components include the land,
processing buildings, administrative and other offices,
warehouses, laboratories, transportation, shipping and receiving
facilities, utility and waste disposal facilities, shops and other
permanent parts of the plant.
The construction overhead cost consists of field office and
supervision expenses, home-office expenses, engineering
expenses, miscellaneous construction costs, contactor’s fees
and contingencies.
In some cases, construction overhead is proportioned between
manufacturing and non-manufacturing fixed capital investment.

1.
2.
3.
4.
5.
6.
Working Capital
The working capital for an industrial plant consists of the total
amount of money invested in:
raw materials and supplies carried in stock
finished products in stock and semi finished products in the
manufacturing process.
accounts receivable
cash kept on hand for monthly payment of operating expenses
such as salaries, wages and raw material purchases.
accounts payable
taxes payable.
Since the credit terms extended to customers are usually based
on allowable 30 day payment period, the working capital required
for accounts receivable ordinarily amounts to the production cost
for one month of production.
The ratio of working capital to the total capital investment varies
with different processes as 10 to 20 %. This percentage may
increase up to 50 percent or more for companies with seasonal
raw material demand.
Estimation of Capital Investment
Capital investment estimations are done
with several reasons as;

i.
ii.
iii.
iv.
provide feasibility analysis
help investors to decide between alternatives
help investigations for money supply
for new projects help for probabilities of bidding.
The aim for the estimate and the aimed
accuracy level directly affects the spent
time and money.
Type of
Estimation
Probable
Accuracy
Level (%)
Cost (as
percentage
of project
cost)
Prepared
by
Order of magnitude
or ratio estimate
Study or factored
estimate
30-50
1-0.1
20-30
0.1-0.2
Design
engineer
A project
group
Preliminary or
10-25
budget authorization
estimate
0.4-0.8
Engineering
company
Definitive or project
control estimate
Detailed or
contractor’s
estimate
5-15
1-3
Contractor
2-5
5-10
Contractor

Order of Magnitude Estimate (Based on the
Method of Hill, 1956)
This estimation method can be applied rapidly
and is useful in determining whether a is worth
pursuing, especially when there are competing
routes. Bench-scale laboratory data is sufficient
to determine the type of equipment and its
arrangement to convert raw materials to
products.
To produce the estimate production rate in
amount per year and flow sheet are required.

Study estimate (Based on the overall Factor
Method of Lang, 1948)
Study estimate is based on a preliminary process
design, where capital cost of a plant is estimated
using overall factors that multiply estimates of the
delivered cost of the major items of the process
equipment. This method requires a process
design complete with mass and energy balance
and equipment sizing. In addition, materials of
construction for the major items of equipment
including the heat exchangers and pumps must
be known.
Considerably more time is required for this
estimate than order of magnitude estimate. But,
accuracy is improved to ±35%.

Preliminary estimate (Based on the Individual
Factors Method of Guthrie,1974)
This method is best carried out after an optimal
process design has been developed, complete
with a mass and energy balance, equipment
sizing, selection of materials of construction and
required process control configuration is
incorporated.
In this type of estimates accuracy can be
improved up to ± 20 %.
Cost Indexes



The purchased cost of processing equipment is generally
obtained from charts, equations or quotes from vendors
which are based on conditions at some time in the past.
However costs are not static and because of inflation they
generally increase with time. To update cost data at past to
costs that are representative of the conditions of today cost
indexes are used.
A cost index is merely an index value for a specific time
showing the cost at that time relative to a certain base time.
If the cost at some time in the past is known, the equivalent
cost at the present time ca be determined by multiplying the
original cost by the ratio of the present index value to the
index value applicable when the original cost was obtained.
Cost indexes can be used to give a general estimate, but no
cost index can take into account all factors, such as special
technological advancements or local conditions. The
common indexes permit fairly accurate estimates if the time
period is less than 10 years.
 present  original

index value at present time

  


 cost   cost  index value at timeoriginalcost wasobtained
Year
1975
1985
1995
CE
182
325
381
MS
452
813
1037
ENR
207
392
509
2001
395
1110
594





Many different types of cost indexes are published regularly. Some
of these can be used for estimating equipment costs, others apply
specifically to labor, construction, materials or other specialized
fields.
Most common indexes for process industries are:
The Chemical Engineering (CE) Plant Cost Index (I=100 for 1958)
The Marshall and Swift (MS) Equipment Cost Index (I=100 for
1926) Contains all industry average equipment purchase cost.
The Engineering News-Record (ENR) Construction Cost Index
(I=100 for 1967) This index shows the variations in labor rates and
materials costs for industrial construction.
In our country such indexes are not provided. However, some
indexes are prepared as life index, construction, materials and
workmanship prices of some companies. These are published by,
TÜİK, DPT, Bayındırlık Bakanlığı, Sanayi ve Ticaret Bakanlığı,
Sanayi ve ticaret odaları,etc
If the cost indexes are not found for our country, an approximate
solution might be the use of the indexes in any country and
calculating the amount based on currency exchange rate.
Fixed Capital Investment Items

1.
2.
3.
4.
5.
6.
7.
8.
9.

1.
2.
3.
4.
Direct Costs
Purchased equipment
Purchased equipment installation
Instrumentation and controls
Piping
Electrical equipment and materials
Building (including services
Yard improvements
Service facilities
Land
Indirect Costs
Engineering and Supervision
Construction expenses
Contractor’s fee
Contingencies
1.
Purchased equipment
The cost of purchased equipment is the
basis of several pre-design methods for
estimating capital investment.
It is often necessary to estimate the cost of
a piece of equipment based on a different
operational capacity involved. Good results
can be obtained by using the logarithmic
relationship known as the six-tenths factor
rule.
2. Purchased equipment Installation
The installation of equipment involves costs
for labor, foundations, supports, platforms,
construction expenses and other factors
directly related to the erection of purchased
equipment.
When very high or very low temperatures are
involved, insulation factors can become
important and it may be necessary to
estimate insulation costs with a great deal of
care.
3. Instrumentation and Controls
Instrument costs, installation labor costs and expenses
for auxiliary equipment and materials constitute the
major portion of the capital investment required for
instrumentation.
Total instrumentation cost depends on the amount of
control required and may amount to 6-30 percent of
the purchased cost for all equipment.
4. Piping
The cost for piping covers labor, valves, fittings, pipe,
supports and other items involved in the complete
erection of all piping used directly in the process.
Piping estimation methods involve either some degree
of piping take-off from detailed drawings and flow
sheets or using a factor technique when neither
detailed drawings nor flow sheets are available.
5. Electrical Installation
The cost for electrical installations consists primarily
of installation labor and materials for power and
lighting, with building service lighting usually included
under the heading of building and services costs.
6. Buildings including services
The cost for buildings including services consists of
expenses for labor, materials and supplies involved
in the construction of all buildings connected with the
plant
One of the important items for building costs arises
when huge amounts of storage requirements exist.
(in food industry)
7. Yard Improvements
Costs for fencing, grading, roads, sidewalks, railroad
sidings, landscaping and similar items constitute the
portion of the capital investment included in yard
improvements.
8. Service Facilities
Utilities for supplying steam, water, power,
compressed air and fuel are some service facilities
of an industrial plant. Waste disposal, administrative
offices, fire protection, first aid, cafeteria, shipping
and unloading facilities, warehouses, control rooms,
storage facilities are included in service facilities
cost.
9. Land
The cost for land and the accompanying surveys
and fees depends on the location of the property.
Land is not considered in depreciation charges.

Indirect costs
1. Engineering and Supervision
The costs for construction design and engineering, drafting,
purchasing, accounting, construction and cost engineering,
travel, communications and home office expenses including
overhead constitute the capital investment for engineering and
supervision.
2. Construction Expense
Construction expense includes temporary construction and
operation, construction tools and rentals, personnel located at
the construction site, construction payroll, travel and living, taxes
and insurance and other construction overhead.
3. Contractor’s Fee
The contractor’s fee varies for different situations.
4. Contingencies
A contingency factor is usually included in an estimate of capital
investment to compensate for unpredictable events.

1.
2.
Startup expense
After plant construction has been completed, there are
quite frequent changes that have to be made before
the plant can operate at optimum design conditions.
These changes involve expenditures for materials and
equipment and result in loss of income while the plant
is shut down or is in operation with partial capacity.
The cost of plant startup is typically estimated as 10%
of Fixed Capital Investment.
Some company accountants may prefer to divide
plant startup costs into two categories;
those costs incurred by the contractor in checking
equipment performance, calibrating controllers and
other plant equipment and commissioning the plant
(included in capital cost)
those costs incurred by plant operating personnel
when starting up and shutting down the plant
(included in operating costs)
Estimation of Total Product Cost

The methods of estimating the total capital
investment have been discussed up to this time,
which constitutes only one part of a complete cost
estimate. Another equally important part is the
estimation of costs for operating the plant and
selling the products. These costs can be combined
under the general heading of “total product cost” ,
which is further divided into categories of


manufacturing costs
general expenses
Total product costs are commonly calculated on
one of three bases;

daily basis
unit of product basis
annual basis




The annual cost basis is probably the best choice
for estimation of total product cost, since:
1.
2.
3.
4.
the effect of seasonal variations is smoothed out
plant on-stream time or equipment operating factor is
considered
it permits more rapid calculation of operating costs at less
than fully capacity
it provides a convenient way of considering infrequently
occurring but large expenses.
I. Manufacturing Costs

All expenses directly connected with the
manufacturing operation or the physical equipment
of a process plant itself are included in the
manufacturing costs.
I.1. Direct Production Costs
Direct production costs include expenses directly
associated with the manufacturing operation. Some
of the variable costs listed here as a part of the
direct production costs have an element of fixed
cost in them. Although their amount changes with
production level some part still occurs when the
process plant is shut down
I.1.1. Raw Materials
In food industry one of the major costs of production is for the raw
materials in involved in the process. The amount of the raw materials
which must be supplied per unit of time or per unit of product can be
determined from process material balances. The cost should be
mainly based on the amount of raw materials consumed ( some of the
materials are recovered, so they are not cost items ).
Direct price quotations from prospective suppliers are preferable and
freight or transportation charges should be included in the rawmaterial cost. These charges should be based on the form in which
the raw materials are to be purchased for use in the final plant. These
charges are expressed in four different methods:
i.CIF Cost Insurance Freight
All cost items are to be paid by the seller. The cost of the material does not depend on
the location taxes, municipality charges, housing foundation, education foundation and
defending foundations are all included .
ii. FOB Free on Board
Only the transportation charges are paid by supplier
iii. FOB Production Center
The purchaser have to pay fort he transportation charges.
iv. Shared Freight
The seller should bring the materials to the nearest distribution center and the purchaser
pays fort he transportation charge from those centers to the factory.
If the cost of raw material is an important part of
total cost, then the firm should make additional
contracts with producers. This may even effect the
plant location. The estimations for future changes
should also be included in the cost estimation.
Other items affecting raw material cost are the
amount of order and the quality of raw material. The
quality is especially important for food industries
and standards should be established and obeyed
for each group.
If the raw material is obtained within the firm, these
might be profit including selling prices or some
fictitious prices for taxation purposes.
I.1.2. Operating Labor
In general operating labor may be divided into skilled
and unskilled labor. Labor charges are determined by
experience of firm. In some industrially developed
countries labor charges are fixed and published
periodically.
By using the flow sheet of the process the operating
labor can be estimated from an analysis of the work to
be done. In batch operations operating labor estimation
is more important. Primarily, in these operations labor
requirements are higher, also worker can be adjusted to
be involved in more than one process. In continuous
operations need for labor is not affected by amount of
production. For such operations labor can be considered
as fixed. However, changes in amount of production
affect the labor requirements as materials handling,
packaging and so on.
I.1.3. Direct Supervisory and Clerical
Labor
A certain amount of direct supervisory and
clerical labor is always required for a
manufacturing operation. The necessary
amount of this type of labor is related to:
- total amount of operating labor
- complexity of the operation
- product quality standards.
I.1.4 Utilities
The cost for utilities depends on
•
•
•
amount of consumption
plant location
source
The utility may be purchased at predetermined rates
from an outside source or the service may be
available from within the company. If the company
supplied its own service and this is utilized for just
one process, the entire cost of the service
installation is usually charged to the manufacturing
process. If the service is utilized for the production of
several different products the service cost is
apportioned among the different products the
service cost is apportioned among different
products at a rate based on the amount of individual
consumption.




Cost for steam is expressed per ton. This cost includes fuel,
pretreatment of water, labor, depreciation and maintenance. If the
steam is used only for heating purposes, estimation of the cost is
easy. However, if it’s used for production of electricity in turbines
and the exhaust part will be used for heating the estimation
becomes more complex.
Cooling water cost includes the cost for water, chemicals,
depreciation charges, maintenance and pumping. The use of
cooling water for one pass is not feasible. The cooling water itself
is cooled by exposing to air and with adiabatic vaporization of
some part. Therefore climate is important for water cooling
systems design. Another cost will be faced for the conditioning of
water. ( as pH adjustment, addition of biocides to prevent growth
of microorganisms etc. ).
In food processing factories, nitrogen is used as inert gas. It’s sold
in pressurized containers and price for each cubic meters is fixed.
Another gaseous item is compressed air, it’s cost is a combination
of compressor and energy costs.
Electricity is obtained from central distribution in most of the cases
and in our country it’s supplied by TEDAŞ with fixed rates.
I.1.5 Maintenance and Repairs
A considerable amount of expense is necessary for maintenance
and repairs if a plant is to be kept in efficient operating condition.
The cost for maintenance is function of;
- complexity of process
- material of construction
- skills of persons using the equipment
- previous maintenance and repair Works at the plant.
The cost for maintenance and repair is composed of
i, necessary material
ii. labor
iii. supervision and some general expenses including timing.
In the operation of plant, maintenance and repair costs are not
stationary, they increase as the time of usage increase as the time
of usage increases. On the other hand, if additional installations
are made the maintenance and repair costs will be reduced.
Therefore, in every plant the records for maintenance and repair
should be kept with attention.
I.1.6 Operating Supplies
In any manufacturing operation, many supplies are needed to
keep the process functioning efficiently. Items such as charts,
lubricants, test chemicals, laboratory chemicals, guarding
supplies can be considered as operating supplies.
I.1.7. Laboratory Charges
The cost of laboratory tests for control of operations and for
product quality-control is covered in laboratory charges.
I.1.8. Patents and Royalties
Many manufacturing processes are covered by patents and it
may be necessary to pay a set amount for patents rights or
royalty based on the amount of material produced. if the patent is
obtained in the plant, a certain amount of the total expense
should be considered as an operating expense. In a manner,
these costs are amortized over the legally protected life of the
patent.
I.1.9. Catalysts and Solvents
Depending on the process involved some solvents,
preservatives, natural dyes, leavening agents, purified vitamins
etc. are used which brings additional costs.
I.2. Fixed Charges
Fixed charges are expenses which remain practically constant
from year to year and do not very widely with changes in
production rate. These are also expenses which are always
present in an industrial plant whether or not the manufacturing
process is in operation.
I.2.1 Depreciation
Equipments, buildings and other material objects compromising a
manufacturing plant require an initial investment which must be
written off as a manufacturing expense. In order to write off this
cost, a decrease in value is assumed to occur throughout the usual
life of the material usage possessions. This decrease in value is
designated as depreciation.
Since depreciation rates are very important in determining the
amount of income tax, allowable depreciation rates based on the
probable useful life of various types of equipment and other fixed
items involved in manufacturing operations are established.
The most widely used method for depreciation is straight-line
method. In applying this method, a useful-life period and a salvage
value at the end of the useful life are assumed. The difference
between initial cost and salvage value divided by the total years of
useful life gives the annual cost due to depreciation.
I.2.2. Local Taxes
These taxes are paid independent of income. Taxes
paid for municipalities, (geçici vergi, muhtasar,
stopaj, eğitime katkı payı…)
I.2.3. Insurance
Insurance rates depend on the type pf process
being carried out in the manufacturing operation and
on the extent of available protection facilities.
I.2.4. Rent
Annual costs for rented land and buildings show
great variations depending on location.
I.3. Plant Overhead Costs
These costs are similar to the basic fixed chargers in that they do not vary
widely with changes in production rate.
The expenditures required for routine plant services are included in plant
overhead costs.
Expenses connected with the following comprise the bulk of the charges
for plants overhead.










Hospital and medical services
Safety and protection janitor and similar services
General plant maintenance and overhead. Employment offices, distribution of
utilities, shops
Payroll overhead
Packaging
Restaurant, cafeteria and recreation facilities
Salvage
Control laboratories
Plant superintendence
Storage facilities; interplant communications and transportation , warehouses,
shipping and receiving facilities.
These charges are closely related to the costs for all labor directly
connected with the production operation.
II. General Expenses
In addition to the manufacturing costs, other
general expenses are involved in any companies
operations.
II. 1. Administrative Expenses
These costs cannot be charged directly to
manufacturing costs however it’s necessary to
include the administrative costs if the economic
analysis is to be complete.





executive salaries; administrators, accountants
clerical wages; secretaries, typists
engineering and legal costs; administrative buildings and
other administrative activities.
Office maintenance; costs for Office supplies and
equipment.
Communications; outside communications.
II.2. Distribution and Marketing Expenses
From a practical viewpoint, no manufacturing
operation can be considered a success until
the products have been sold or put to some
profitable use. Therefore, the expenses
involved in selling the products should be
considered.
Distribution and marketing costs vary widely
for different types of plants depending on the





particular material being produced
other products sold by the company
plant location
company policies
number of consumers
II.3. Research and Development Costs
New methods and products are constantly being developed in modern
industries. Research and development costs include;




salaries and wages for all personnel connected with this work
fixed and operating expenses for all machinery and equipment involved
cost for materials and supplies
direct overhead expenses etc.
II.4 Financing
When the capital investment is supplied with barrowed capital either
partially or as a whole, then this amount should be paid back together with
interest.
A fixed rate of interest is established at the time the capital is barrowed,
therefore interest is a definite cost if the capital is to be barrowed.
For income tax calculations, interest on owned Money cannot be charged
as a cost.
II.5. Contingencies
Unexpected happenings and expenditures should be combined in this title
and an amount is shown as general expenses.