Unit – III: Introduction to Cost Estimation

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V.R.S. College of Engineering & Technology,
(Reaccredited by NAAC and an ISO 9001:2008 Recertified Institution)
Arasur-607107, Villupuram District.
Subject Name : Process Planning and Cost Estimation
Subject code : CME 396
Regulation : R-2021
Year : Third Year
Semester : VI
UNIT III
INTRODUCTION TO COST ESTIMATION
SYLLABUS
Importance of costing and estimation –methods of costing-elements of cost estimation –Types of
estimates – Estimating procedure- Estimation labor cost, material cost- allocation of overhead charges-
Calculation of depreciation cost.
PART-A
Importance of costing and estimation
1. Define cost estimating.
Cost estimation may be defined as the process of determining the expenses before manufacturing a
product.
2. Write the importance of estimating. (April/May-10) Why is costing and estimation important in
manufacturing( AU Apr/May 2024)
➢ To determine the Selling Price
➢ To Decide the make or buy decision
➢ To Prepare a Budget
➢ To Prepare a Tender.
Importance of Costing
➢ To verify quotations submitted by vendors.
➢ To prepare production budget
To evaluate alternate designs of product
3. What is the objective of estimating?
The main purpose or objectives of estimating are
➢ To establish the selling price of a product.
➢ To determine how much must be invested in equipment.
➢ To establish a standard of performance at the start of project.

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➢ To assist in long term financial planning.
➢ To prepare production budget.
➢ To evaluate alternate designs of a product.
4. List the function of estimating. (May/June-13)
The functions of estimations are,
➢ To calculate the cost of new material needed to manufacture a product.
➢ To find the cost of parts to be purchased from outside vendors.
➢ To find the cost of equipment, machinery, tools, jigs and fixtures etc. required to be purchased to
make the product.
➢ To calculate various overhead charges associated with the product.
➢ To calculate the selling price of the product.
➢ To maintain records of previous estimating activities of the company for future references.
➢ To decide the most economical method of making the product.
5. What is costing? (Nov/Dec-2012)
Costing is the process of determining the actual product cost.
6. What are the aims of cost accounting? (May/June- 20l2) (Nov/Dec 2016)
The aims of cost accounting are,
➢ To compare the actual cost with the estimated cost to know whether the estimate had been realistic
or not.
➢ Wastages and undesirable expenses are pointed out requiring corrective measures.
➢ It helps to locate the reasons for the increase or decrease of loss of profits of a company.
➢ It helps in determining the discount on catalogue or market price of the product.
➢ It helps the enterprise to prepare its budget.
7. What is activity based costing? (April/May 2018)
➢ Activity-based costing is a costing methodology.
➢ It identifies activities in an organisation and assigns the cost of each activity with resources to all
products and services according to the actual consumption by each.
8. What are cost allowances? (Nov/Dec-2010)
It is not possible for a worker to do his job continuously without any break. There are many
interruptions (stoppage of work) taking place. Extra time is added to the basic time to compensate this
interruption. This extra time given is known as allowance. The cost associated with this is called
allowance cost.
9. Define overhead cost. (April/May 2010) (Nov/Dec-2021)
Overhead expenses are all cost on the income statement expect for direct labor, direct materials,
and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal
fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures and utilities.
10. What are allowances in estimation? (May/June-12) (Nov/Dec-09) (Nov/Dec -17)
• Personal allowances,

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• Fatigue allowances,
• Contingency allowances,
• Process allowances,
• Interference allowances and
• Special allowances
11. Describe the sources of errors in estimating. (Nov/Dec-09)
Errors can be originated from various sources. Errors can be due to the wrong data, incomplete
data, due to inexperience of the estimator and some of the unavoidable sources like machinery
breakdown, power failure and strike.
12. Why importance of making realistic cost estimates in emphasized? Apr/May-2019
The most effective way to generate an estimate of a new product's cost, engineering change cost,
or innovation cost is through a detailed cost investigation. Analysis of the available materials and
processes leads to the most economical and financial decisions.
13. What is parametric estimating? Apr/May-2019
❖ Parametric estimating is the act of estimating cost or time by the application of mathematical
formulas.
❖ These formulas can be as simple as multiplies or as complex as regression models.
❖ Many companies use some form of parametric estimating to develop sales forecasting. The
examples cited below will explain how parametric estimating is used in industries.
14. Define over Estimate.
Estimated cost is above the actual cost of product.
15. Define Under Estimate. (Nov/Dec-14)
Estimated cost is below the actual cost of product.
Methods of costing
16. List the "Methods of costing". (Nov/Dec-13)
(a)Process costing.
(b) Job costing.
(c) Batch costing.
(d) Hybrid costing systems.
17. Define cost accounting? (April/May-15) (May/June-14) (Nov/Dec-15)(April/May 2021)
Costing is also known as cost accounting. It is the determination of an actual cost of a component
after adding different expenses in various departments.
18. Write any two objectives of cost estimation. (April/May-15)(May/June-14) (May/June 09)
State the objectives of cost estimation.(Nov/Dec-2019)
❖ To verify quotations submitted by vendors.
❖ To prepare production budget
❖ To evaluate alternate designs of product.
❖ To establish the standard of performance that may be used to control costs.

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19. Define multiple cost method? (Nov/Dec-13)
✓ This method of costing means combination of two or more methods of costing like operation
costing and output costing.
✓ Under this method the cost of different sections of production are combined after finding out the
cost of each and every part manufactured.
✓ This method of costing is suitable for the industries manufacturing motor cars, engines, aircraft,
tractors, etc.
20. Who are direct labours and indirect labours?
Direct labours are the workers who actually work or process different materials, to convert them
into product, either manually or with the help of machines. Examples of direct labour are: operators
working in lathe, welding machines, foundry, etc.
Indirect labours are the non-productive staff, which helps the productive labour in performing
their duties. Examples for indirect labours are: Supervisors, inspectors, foreman, gate keeper, etc.
21. What is collection of cost? (Or) What are the various components of cost?
The various components of cost of any product manufacturing in any production concern are
1. Prime cost = Direct material cost + Direct labour cost + Direct expenses
2. Factory cost = Prime cost + Factory overheads
3. Cost of production = Factory cost + Administrative overheads + Miscellaneous overheads (if any)
4. Total cost = Cost of production + Selling and distribution overheads
The selling price of any product manufactured can be arrived at by adding a certain percentage of profit.
Elements of cost estimation
22. What are the elements of costing? (Nov/Dec-15) (April/May 2018)
What are the elements of cost? Give examples for each. (Nov/Dec-2019)
The total cost is made up of three main elements.
a. Material- Eg. Raw Material cost
b. Labor- Eg Labor salary
c. Other Expenses- Eg Office Rent
They can be further classified into direct and indirect elements.
23. Define prime cost. (Nov/Dec-09)
Prime cost also known as direct cost consists of direct material costs, direct labour cost and
direct expenses.
24. What is batch costing?(April/May-15)
Batch costing is a form of job costing. Instead of costing each component separately, each batch
of components are taken together and treated as a job.
25. What are expenses?
Apart from material and labor cost in each factory there are several other expenditures such as
cost of special layouts, designs, etc. hire of special tools and equipments; depreciation charges of plants

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and factory building; building rent; cost of transportation, salaries and commissions to salesman etc.
Types of estimates and Estimating procedure
26. What are the types of estimation?
The types of estimators are,
• Preliminary estimation and
• Final estimation.
27. Define parametric cost estimation. (Nov/Dec- 12)
The product cost estimate is determined using parametric cost estimation technique. All variables
or parameters of process, part features and other cost parameters are considered in cost estimation.
28. What is meant by conceptual cost estimating? (Nov/Dec-14)
➢ It is estimating during the conceptual design stage.
➢ In the conceptual design stage, the geometry of parts and materials has not been specified.
➢ The costs associated with a change in the design are low.
➢ The incurred costs are only 5 to 7% of the total cost whereas the committed costs are 75 to
85% of the total cost.
29. What is meant by target cost?(Nov/Dec-14)
Product costing method in which a final cost is determined after market analysis, and the product
is designed or redesigned to meet it
1. Contracting: Final agreed-upon cost which serves as a basis for computing cost savings in
incentive type contracts.
2. Costing: Final cost of a product or service that must be achieved in order to generate the desired
level of sales revenue and income.
30. What do you understand by budgetary estimates? (Apr/May-2008)
The budgetary estimate is used for planning the cost of a piece part, assembly, or project.
31. List the types of estimates.(Nov/Dec-2007 &2010 & 2011, M /J-2009, 2010,2014)
1. Preliminary estimate
2. Final estimate
3. Budgetary
4. Using Past History
32. What are the factors for calculating the probable cost of a product?
The factors for calculating the probable cost of a product are
❖ Design time.
❖ Drafting time.
❖ Method studies, time studies, planning and production time.
❖ Design, procurement and manufacture of special patterns, cores, core boxes, flasks, tools,
dies jigs and fixtures etc.
❖ Experimental work.
❖ Materials.

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❖ Labour.
❖ Overheads.
❖ Quantity of product requirement
❖ Probable future changes in materials.
Estimation labor cost, material cost
33. What is meant by ladder of cost with neat sketch?
It is diagrammatic representation showing the build-up of total cost and selling price of a
component. It is also known as 'Cost structure chart'.
Profit (or)
Loss
Selling price
(or) Maker price
Selling
distribution
Total (or)
selling cost
(or)
Catalogue price
Administrative
Expenses
Office cost (or)
Production
(or)
manufacturing cost
Factory
expenses
Factory cost
(or)
Works cost
Direct
material
Prime
cost (or)
Direct
Cost
Direct labor
Direct
expense
LADDER OF COST
34. What are the types of expenses?
(i) Direct Expenses
Direct expenses also known as chargeable expenses include any expenditure other than direct
material or direct labor incurred on a specific cost unit. These are the expenses which can be charged
directly to a particular job and are done for that specific job only.
For example, Purchase of special tools and equipment, cost of special jigs and fixtures or
some special patterns and its maintenance cost, costs of layouts, designs and drawings or
experimental work on a particular job etc.
(ii)Indirect Expenses (Overheads)
Overhead is the sum of indirect labor cost, indirect material cost and other expenses including
service which cannot be conveniently charged to specific cost unit.
These can be further classified as
1. Production expenses/Factory expenses.
2. Administrative expenses.
3. Selling expenses.
4. Distribution expenses.
35. Write Short notes on indirect material cost.
The indirect materials include oils, general tools, greases, sand papers, coolants, cotton waste

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etc. The cost associated with indirect materials is called indirect material cost.
36. What do you meant by Catalogue price?
Making price (or) catalogue price: Some percentage of discounts allowed to the distributors of
product is added into the selling price. The result obtained is called the market price (or) catalogue price.
37. Define contingency allowance.(Nov/Dec-14)
This is a small allowance of time which may be included in the standard time to meet unforeseen
items of work, or delays (e.g. waiting for raw materials, tools). Contingency allowance is 5% (maximum)
or Normal Time.
38. What is administrative overhead?
These expenses include all the expenses on managerial or administrative staff for the planning
and policy making work. Some examples of administrative expenses are:
(i) Salaries of directors and managing directors.
(ii) Salaries of cost, finance and secretary office staff including clerks and peons.
(iii) Expenses of direct amenities like telephone, coolers and other modern equipments.
(iv) Travelling expenses for attending meetings etc.
39. What are the methods for allocating overhead expenses? (May/June-2010) Specify the elements
involved in the allocation of overhead charges in cost estimation.(AU Apr/May 2024)
The methods for allocating overhead expenses are
❖ Allocation by cost proportion.
❖ Allocation by hourly rate.
❖ Allocation by unit rate.
40. Give examples of factory overheads.
1. Cost of fuel and power
2. Internal transport.
3. Repair and maintenance cost
4. Rent, Taxes and insurance expenses
5. Cost incurred on depreciation of plant, machinery, factory buildings, etc
41. What you mean by Depreciation? (Nov/Dec-2013)(April/May 2021)
The Reduction the value of the asset based on time.
42. What are the causes of depreciation? (April/May 2018)
1. Depreciation due to physical conditions
2. Wear and tear
3. Physical decay
4. Accident
5. Poor maintenance
6. Depreciation due to functional conditions like Inadequacy and Obsolescence.
43. Estimate the power cost for melting aluminium of 150 kg at 650˚C from room temperature of

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35˚C. Specific and latent heat of Aluminium are 0.91 kJ/Kg and 398 kJ/kg respectively. Unit
cost of power is Rs. 7. (Apr/May 2018)
Given Data:
Mass=150 kg
Maximum Temperature = 650˚ C
Minimum Temperature = 35˚ C
Specific Heat of aluminum = 0.91 kJ/kg
Latent Heat of aluminum = 398 kJ/kg
Unit cost of power = Rs 7
To Find:
Power cost=?
Solution:
Energy required= (Specific Heat of aluminum X Mass X Temperature difference) + (Latent Heat
of aluminum Mass)
Energy required = [0.91
𝑘𝐽
𝑘𝑔
𝑋 150 𝑘𝑔 𝑋 (650 − 35)] + [398
kJ
kg
X 150 kg]
= 83,947.5+59,700
=143647 kJ
Energy required =
(143647 𝑘𝐽)
(0.000278)
kWh
=39.90 kWh
Power Cost = Energy required X Unit Cost of power
= 39.90 X 7
= Rs. 279.3
50. What is man hour and machine hour rate?(Nov/Dec-2019)
In short, machine hour rate means the factory expenses incurred in running a machine for an hour. Man
hour rate means the factory expenses incurred in working a man for an hour.
51. List out the various methods of allocation of overheads. (Nov/Dec 2018)
Following are some important methods of allocation of overhead costs:
1. Allocation by cost proportion.
2. Allocation by hourly rate.
3. Allocation by unit rate.
PART-B
Importance of costing and estimation
1. Write down the objectives of cost estimation.
Explain the objectives of cost estimating. Apr/May-2019
The objectives of cost estimation are given below:

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i. It gives an indication to the manufacturer whether the project to be undertaken will be
economical or not.
ii. To chose most economical method
iii. To fix the selling price (sales price) of the product in advance of actual production.
iv. This is required to ensure that the product will be competitive and also to provide a reasonable
profit on the investment of the company.
v. It helps in taking decisions to make or to buy.
vi. Cost estimation gives detailed information of all the operations and their costs, thus setting a
standard to be achieved in actual practice.
vii. It gives an estimate of the total expenditure.
viii. It helps a contractor to submit accurate tenders for entering into contract to manufacture certain
products.
ix. Cost estimation enables the management to plan for procurement of raw materials/tools etc., as
it gives detailed requirements.
If a job is overestimated, i.e., the estimated cost is much above the actual cost of the product,
the shop or firm will not be able to compete with its competitors who have estimated the price correctly
and loses the order to its competitors.
On the other hand, to underestimate i.e., estimated cost is below the actual cost of product,
means a financial loss to the firm and too many losses mean failure or closure of the shop.
2. Describe the cost of a product with suitable example.[May/June-14]
The components or cost discussed above can be grouped as follows:
1. Prime cost = Direct material cost + Direct labor cost + Direct expenses
2. Factory cost = Prime cost + Factory expenses
3. Production cost =Factory cost + Administrative expenses
4. Total or Ultimate cost = Production cost + Selling and distribution expenses.
5. Selling price == Ultimate cost + Profit
The above relations can be illustrated on a chart (Ladder of costs)
Fig 3.1 block diagram showing the build-up of total cost and selling price of a component

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Example: For an electric fan available in the market the catalogue price of Rs. 1500. The discount allowed to
the distributor is 12 percent. Administrative and sales overheads arc 80 percent of factory cost. The direct
material cost. Direct labour cost and factory overheads are in the ratio of 1: 3: 2 respectively. If the direct labor
cost is Rs. 300 and the central excise duty 10 percent of the selling price.
Then company's profit on each item can be calculated as follows.
Catalogue Price = Rs. 1500
Discount to distributor =1500 x 0.12 = Rs. 180
Catalogue price '" cost of Administrative and selling expense'+ Profit + Central excise
Discount to distributor’s Sales price Central excise Discount to distributor direct labor cost Rs. 300
Direct material cost = Rs. 300 x
1
3
=Rs.1 00
Factory on cost = Rs. 300 x
2
3
= Rs. 200
Factory cost = 300 + 100 + 200 =Rs. 600
Administrative and sales overheads = 80 percent of factory cost
= 600 ×
80
100
= Rs. 480
Let the profit = Rs. P per item
Then selling price = 600 + 480 + P = Rs. (l080 + P)
Excise duty = 10
percent of selling price = (1080 + 𝑃 ×
10
100
=
1
10
(1080 + 𝑃)
Catalogue Price = Sales Price + Central Excise + Discount to distributors
1500 = (1080+P- P) +
1
10
(1080+P) +108
Profit P= Rs. 120 per item
3. Differentiate between cost estimating and cost accounting. (May/June 09)(May/June 2013)
(Nov/Dec -15) (Nov/Dec 2017) (Nov/Dec 2018) (Nov/Dec 2021)
POINT OF
COMPARISON
COST ESTIMATING COST ACCOUNTING
1. Type of cost
It gives the probable cost of the
product before the start of the
manufacturing
It gives actual cost of the product before
adding different expenses in various
departments.
2.Duration of
process
Estimating is carried out before the
actual production a product
It usually starts with the issue of order
for production of a product.

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3. Nature of
quality
A qualified technical person or
engineer having a thorough
knowledge of the drawings and
manufacturing process is required.
It can be done by a person qualified of
for accounts instead of a technical
person.
4.Main
objectives
(i) To establish the selling price of the
product
(ii) To help in setting up market price
for a proposed product to be
manufactured, price for a proposed
product to be manufactured.
(iii) To take make or buy decision
(i) To determine the actual cost of the
final product.
(ii) To form a basic for fixing the selling
price
(iii) To check the accuracy of estimates
(iv) To help in detecting the undesirable
wastage.
Methods of costing
4. Describe cost accounting with objectives. (Nov/Dec 2016) (May/June 09)
➢ Cost accounting is the determination of an actual cost of a component after adding different
expenses in various departments
➢ It may be defined as a system which systematically records all the expenditures to determine the
cost of manufactured products.
➢ Costing or cost accounting means classifying, recording and allocating the appropriate
expenditure for determining the cost of production.
➢ Cost accounting is a power full management tool.
Importance of Costing
➢ Determining ,classifying and analyzing the cost and incoming a business company
➢ Make or buy decision
➢ To expand or contract the existing one.
➢ Establishing standards for measuring efficiency
OBJECTIVES OF COST ACCOUNTING
The purpose of costing are:
❖ To determine the actual cost of the product
❖ To fixing the selling price of the product
❖ To compare actual cost with the estimate cost to know whether the estimate had been realistic or

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not
❖ To take Make or buy decision
❖ To establish the selling price of the product
❖ To suggest change in design
❖ To fix the discount
❖ To prepare quotations/tenders
❖ To prepare budget
❖ To meet certain legal and government regulations, cost data necessary
❖ To reduce the production Wastage.
5. Write down the classification of costing. (Nov/Dec 2016) Discuss various methods of costing, such as
job costing, process costing and activity based costing, highlighting their differences and suitability for
different types of manufacturing processes.(AU Apr/May 2024)
Methods of costing can be classified as follows:
1. Job Costing
The cost is determined for each job or a batch of jobs. This method proves valuable in
jobbing work (job shop production i.e., or production of low quantities, often one of a kind of
specialized products) or batch production.
2. Output Costing
It is the cost of a product in output stage.
3. Operating Cost
This method usually applies to utilities or service undertakings viz. transport, gas, electricity
etc, and are same as servicing cost (Rs. per km, Rs. per kW hr/unit).
4. Process Costing
Process costing refers to accumulation of cost by process (Dept. /section) rather than by jobs.
There are other methods of classification of costs also:
(a) Fixed Costs and Variable Costs
The Fixed Costs is independent cost. It does not change with volume
The Variable Costs varies with respect to the volume.
(b) Direct Costs and Indirect Costs
Direct costs are costs, which directly contribute to the final product
Examples : cost of raw materials, cost of labour processing the materials, cost of equipment and special
tooling’s, jigs and fixtures used in the manufacturing of the product.
Indirect costs are costs which cannot be directly contribute to the manufacture of a particular product.
Examples: Wages of inspection and supervisory staff, selling and distribution expenses, administrative
expenses, overhead charges, and cost of indirect materials like lubricants, coolants, grease, repair and
maintenance cost.
Elements of cost estimation
6. Name the various elements of cost. Explain each element in detail giving suitable examples.

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(Nov/Dec 2016) [Nov/Dec-12; April/May-14, May/June-15](April/May 2021)
ELEMENTS OF COST:
COSTING
Costing is the process of recording the expenses in producing a product. Similarly the cost of a
service is calculated by adding all the expenses incurred in providing the service.
UTILITY OF COSTING
Important functions of costing are:
1. To determine the actual cost of each component and cost of the final product.
2. To form a basis for fixing the selling price.
3. To analyze the expenses incurred in production, so that control can be kept over them.
4. To check the accuracy of estimates.
5. To decide make or buy decision
The cost of an engineering product consists of a raw materials, bought out parts, processing and
selling the finished product. The total cost of the product can be divided into following two major
groups:
1. Direct Costs
➢ Direct costs are costs of directly contributing to the final product.
➢ Direct costs include the cost of raw materials, cost of labour processing the materials and cost of
equipment (machine tools) and special tooling (jigs and fixtures) etc., used in the manufacturing
of the product.
2. Indirect Costs
➢ Indirect costs are the costs which cannot be directly allocated to the manufacture of a particular
product.
➢ Indirect costs include the wages of supervisory and inspection staff, selling and distribution
expenses, administrative expenses and costs of indirect materials like grease, lubricants, coolants
and repair and maintenance cost etc.
Elements of Cost: For the purpose of calculations, the total cost of the product is divided into the
following:
(A).Material cost, (B) Labour cost, (C) Other expenses.
(A) Material Cost
Cost of materials is used in the manufacture of product. It is divided into the following
(a) Direct material cost: (April/May 2010)
➢ It is the cost of materials is directly used for the manufacturing of the product.
➢ This expenditure can be directly allocated and charged to the manufacture of a specific product
➢ The procedure for calculating the direct material cost is as follows:
(i) From the product drawing, make a list of all the components required to make the final product.
(ii) Calculate the volume of each component from the drawing dimensions after adding machining
allowances, wherever necessary.

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(iii) The volume of component multiplied by the density of material used gives the weight of the
material per component.
(iv) Add process rejection and other allowances like cutting allowance to get the gross weight per
component.
(v) Multiply the gross weight by the cost of material per unit weight to get the cost of raw material per
component.
(vi) The cost of raw material for all the components is, similarly, calculated and added up which gives
the cost of direct material for the product.
(b) Indirect material cost:
➢ Number of other materials is necessary to help in the conversion of direct materials into final
shape. Such materials are called indirect materials.
➢ The indirect materials include oils, general tools, grease, sand papers, coolants, cotton waste etc.
The cost associated with indirect materials is called indirect material cost.
➢ In some cases certain direct materials like nails, screws, glue, etc.,
(B) Labour Cost
It is the expenditure made on the salaries, wages, overtime, bonuses, etc. of the employees of
the enterprise. It can be classified as:
(a) Direct labour cost: Direct (April/May 2010)
➢ Labour is actually works and processes the materials to convert it into the final shape. The cost
associated with direct labour is called direct labour cost.
➢ The direct labour cost can be identified and allocated to the manufacture of a specific product.
Examples of the direct labour are the workers operating lathes, milling machines or welders, or
assemblers in assembly shop. The direct labour cost may be allocated to a product or job on the
basis of time spent by a worker on a job.
(b) Indirect labour cost: Indirect
➢ Labour is one who is not directly employed in the manufacturing of the product but his services
are used in some indirect manner.
➢ The indirect labour includes supervisors, inspectors, foreman, storekeeper, gatekeeper,
maintenance staff, crane driver etc. The cost associated with indirect labour is called indirect
labour cost.
(c) Other Expenses
➢ Several other expenses such as rent of building, depreciation of plant and machinery, cost of
packing materials, transport and distribution expenses, wages and salaries of administrative staff
and executives are also incurred by the manufacturer.
➢ All this expenditure including the indirect material cost and indirect labour cost is called other
expenses.
(a) Direct expenses:

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➢ Direct expenses include all that expenditure can be directly allocated and charged to a particular
job.
➢ The direct expenses include cost of special jigs or fixtures, patterns, tool made for job, or cost of
research and development work done for that specific job.
(b) Indirect expenses:
➢ All other indirect expenditure incurred by the manufacturer is called indirect expenses. The
indirect expenses are also called overhead expenses or on-cost. The indirect expenses are further
classified as:
(i) Factory expenses.
(ii) Administrative expenses.
(iii) Selling and distribution expenses.
(i) Factory expenses:
➢ It includes rent of factory building, license fee, electricity and telephone bills of factory, insurance
charges etc. Factory expenses are also called “Works expenses”, or “Factory or Works overhead”.
(ii) Administrative expenses:
➢ Administrative expenses or office expenses include the expenditure on control and
administration of the factory.
➢ It includes the salaries of office and administrative staff, rent of office building, postage and
telephone charges, water and electricity charges for office, Director’s fee, legal and audit charges
etc. Administrative expenses are also known as ‘Administrative overheads’.
(c) Selling and distribution expenses:
➢ This is the expenditure incurred on Sales Department for selling the product, i.e., wages, salaries,
commission and travelling allowances of salesmen and officers in Sales Department, cost of
advertisement, packing, delivery and distribution expenses, rent of warehouses etc.
Types of estimates
7. Explain the constituents of job estimate. (OR)
Discusses the various components of a job estimate (Nov/Dec-12, 13) (May/June-13) (Nov/Dec
2017) (Nov/Dec 2018)
The total estimated cost of a product consists of the following cost components:
1. Cost of design.
2. Cost of drafting.
3. Cost of research and development.
4. Cost of raw materials.
5. Cost of labour.
6. Cost of inspection.
7. Cost of tools, jigs and fixtures.
8. Overhead cost.
1. Cost of Design

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➢ The expected time for the design of that component.
➢ The estimate design time multiplied by the salary of designer per unit time gives the estimated
cost of design.
➢ If the design of the component is done by some outside agency, the total amount paid to outside
agency gives the cost of design.
2. Cost of Drafting
➢ Once the design of the component is complete, its drawings have to be prepared by draftsman.
➢ The expected time to be spent in drawing.
3. Cost of Research and Development Work
➢ Before the manufacturing of actual components/parts considerable time and money has to be spent
on research and development.
➢ The research may be theoretical, experimental or developmental research.
➢ The cost of R and D can be estimated by considering various items of expenditure incurred during
R and D work which include:
(i) Cost of labour involved.
(ii) Cost of material used.
(iii) Cost of special equipment used or fabricated for the prototype.
(iv) Depreciation, repair and maintenance cost of experimental set-up.
(v) Cost of services of highly qualified and trained personnel needed for experimentation.
(vi) Cost of preparing Test Reports, if any.
In some cases the cost of R and D may be estimated on the basis of research involved in similar
products produced in the past.
4. Cost of Raw Material
The estimated of cost of materials used in production of a component/product consists of following
steps:
(i) A list of all the materials used in the manufacturing a product (which includes the direct as well as
indirect materials)
(ii) The quantity (weight or volume) of the material expected to be used in the manufacturing of the
product is estimated. The allowance for material wastage, spoilage and scarp are also added for each
component/part.
(iii) Cost of each material is estimated by multiplying the estimated quantity of each material with its
estimated future price. The estimate of future price of a material is made keeping in view of present prices
and general trends and variations.
(iv) Estimated cost of all the materials is added to get the overall estimated material cost.
5. Cost of Labour
➢ The cost of labour involved in the manufacturing of a product is estimated.
➢ In order to estimate the labour time expected to be spent on a job.
6. Cost of Inspection

17
➢ It may be inspection of raw material or in-process inspection or inspection of finished goods.
➢ The cost of inspection equipment, gauges and consumable involved in the inspection and testing
are taken into account while estimating the cost of the product.
7. Cost and Maintenance Charges of Tools, Jigs and Fixtures
➢ Estimated cost of a product includes the estimated cost and maintenance charges for the tools,
jigs, fixtures and dies required in the production.
➢ The cost of tools, jigs, fixtures etc., is estimated considering their present prices, market trend and
the number of times a particular tool can be used during its life-time. The estimated cost divided
by the number of jobs, it can make, gives the tool cost per unit produced.
Estimating procedure
8. Explain various methods of cost estimates. (Nov/dec-2007, Apr/May-2008, Nov/Dec-2009&
Nov/Dec-2011) (May/June 2012) (Apr/May 2018) What is the conceptual cost estimation methods.
Apr/May-2019
The selection of an estimating method depends on the availability of information, time and type
of the product. Three commonly used methods of estimating are:
1. Single person,
2. Conference method,
3. Comparison method,
4. Detailed analysis method
5. Computer Estimating
6. Group Technology
7. Parametric Estimating
8. Statistical Estimating
1. Single Person
➢ In many companies (especially smaller ones) one person develops a cost estimate.
2. Conference method:
▪ Representatives of each department including purchase, production, etc. discuss and decide the
probable cost of the product or service.
▪ This method not often supported by detailed paperwork, standard data, or mathematical
calculations.
▪ Based on verbal or vague information the material, labour and other costs will be estimated.
▪ Thus the accuracy of this method depends on experience and skills of the Process planner
3. Comparison method:
▪ The costs of similar parts of the product are compared
▪ Thus this method is based on past data.
4. Detailed analysis method:
▪ All the data required from material to allowances are detail analyzed by experts and the cost is
calculated.

18
▪ The most reliable and time consuming method
5. Computer estimating:
▪ Computer estimating has become very popular in recent years
▪ Because the computer estimating industry is new, there are no real standards for estimating
programs.
▪ But computers are very reliable when you offer them correct data and methods to estimate.
They are free from errors and also consistent.
6. Parametric estimating:
❖ Parametric estimating is the act of estimating cost or time by the application of mathematical
formulas.
❖ These formulas can be as simple as multiplies or as complex as regression models.
❖ Many companies use some form of parametric estimating to develop sales forecasting. The
examples cited below will explain how parametric estimating is used in industries.
7. Statistical analysis:
❖ The analysis of data through the use of statistical methods has been used for centuries. These data
can be cost versus other information that leads to cost development.
❖ The practitioner must have a well-founded background in the use and application of statistical
methods because an endless array of methods is available. One of the commonly used methods is
regression analysis.
❖ Information can be regressed along a straight line or along a curve. Statistical estimating methods
are very useful in parametric estimating. To use any of these methods also requires the user to
have a sound knowledge of "goodness of data fit". Math models are available to determine how
well data fit a straight line, curve or log linear relationship.
9. Discuss the data requirements and sources for cost estimation (Or) Write the data requirements
and sources of information for cost estimation. (Nov/Dec-07, April/May-08,10, May/June-12
Nov/Dec-14)
Data Requirements and Sources of Information for Cost Estimation:
1) Man-hour cost (Labour rate) i.e., hourly cost of skilled, semi-skilled and unskilled laborers of the
company.
2) Machine-hour cost for different types of equipment and machinery available in the company.
3) Material cost in respect of commercially available materials in the market: cost in Rs. per kg for
different categories of materials like ferrous, non-ferrous, special steel etc., for rods of different
diameters and for different thicknesses in respect of flats/sheet metals.
4) Scarp rates i.e., scarp values of different materials in Rs. per kg.
5) In respect of welding operations, information such as electrode cost, gas cost, flux cost, power
cost, etc.
6) Set-up time for different processes.

19
7) % allowances to be added for computing standard time, relaxation allowance, process allowance,
special allowance as % of normal time as per the policy of the management.
8) Standard time for different types of jobs, if available.
9) Overhead charges in terms of % direct labour cost or overhead rate in Rs. per hr.
10) Life in years permitted for various types of equipment and machines available in the plant for
calculation of depreciation, for cost recovery and for calculation of machine hour rate.
11) Data base of cost calculations carried out by the company in respect of earlier products or jobs
(Historical cost data).
12) Cost data of products available in the market similar to the ones manufactured by the company.
13) Budget estimates prepared by the company for new projects/products.
14) Journals or Data sheets of Professional Associations dealing with Costs and Accounting.
i) Data requirements:
The data required for developing an estimate is listed below. The accuracy of the estimate
depends on the amount and quality of these data.
1. General design specifications: product functions, drawing, performance, tolerances etc.
2. Total anticipated quantity and the production rate.
3. Assembly or layout drawings.
4. List of subassemblies.
5. Bill of material of the product.
6. Tests and inspection required and procedure.
7. Machine tool and other equipment details.
8. Packaging, storage and transportation details.
9. Standard time data.
10. Material release data.
11. Vendor cost and delivery data.
12. Area and building requirements.
ii) Data sources:
The various sources of data for an estimate can be listed as follows.
1. Product engineering and sales department provides general descriptions and quality of the
product.
2. Manufacturing engineering or production department provides the machine tool,
Equipment requirement and general tooling plans.
3. Quality control department: tests, inspection procedure and equipment.
4. The standard time data can be obtained from time studies, operational analysis.
5. The material release date is provided by customer or sales department.
6. Area and building requirements can obtain from plant or plant layout engineer.
7. The packaging and shipping details are obtained from sales department or directly from the
customer.

20
8. Vendor's salesmen, foreman, supervisors, workman, technical societies and associations also
provide some useful information.
10. Write the basic steps in cost estimation. (Nov/Dec-14)
The basic steps in the cost estimation of any product are given below:
1. Make thorough study of cost estimation request to understand it fully.
2. Make an analysis of the product and prepare a bill of materials.
3. Make separate lists of parts to be purchased from the market and parts to be manufacture in plant.
4. Determine the cost of parts to be purchased from outside.
5. Estimate the material cost for the parts/components to be manufactured in plant.
6. Make manufacturing process plan for the parts to be manufactured in plant.
7. Estimate the machining time for each operation listed in the manufacturing process plan.
8. Multiply each operation time by the labour wage rate and add them up to find direct labour cost.
9. Add the estimate of step 4, 5, and 8 to get prime cost of component.
10. Apply overhead costs to get the total cost of the component.
11. The selling price of the component is estimated by adding profit to the total cost obtained in step.
11. Describe in detail the procedure of estimating. (OR)
Explain the procedure followed for estimating the cost of an industrial product. (Nov/Dec -12, 13,
14)
Discuss the estimation procedure and prepare a sample cost estimation form. (Nov/Dec-2019)
Estimating Procedure:
The estimating depal1ment is generally attached with the planning department and is controlled by
production manager. The total procedure is considered to have three stages.
• Fixing of design, accuracy and finish.
• Proper working of estimating department.
• Obtaining a delivery promise from the progress department in view of existing load on the shop.
The planning department sets down the requirements and specifications, type and quantities of
materials, make out the drawing, lays down the methods and sequence of operations, machines to be used,
allowed times and rates of labour etc. Main items to be estimated in order of sequence are as follows:
1. Price list: To prepare the list of all the components of the product.
2. Buy or Manufacture: To decide which components should be made in the factory itself and
which component should be procured from the market?
3. Weight of material: Determination of the weight of the materials with various allowances.
4. Material cost: Determination of the material cost either at market price or at a forecast price.
5. Outside purchases: Determination of prices of outside purchases.
6. Machinery or processing data: Determination of cutting speeds and feeds for the materials
selected and machining times for all operations.
7. Labor cost: Determination of labor cost of each operation from performance times and wage
rates, including manufacturing and assembly and testing.

21
8. Cost of tools and equipment: Determination of cost of necessary special tools or equipment etc.
9. Prime cost: Determination of prime cost by adding labor cost into material cost.
10. Factory overheads: Determination of factory on cost and general overhead charges.
11. Package and delivery charges: Determination of package and delivery charges and also
insurance charges if necessary.
12. Total cost: To calculate the total cost.
13. Standard profit and sales price: To decide standard profit and adding this into total cost so as
to fix the sale price.
14. Discount to be allowed: To decide discount allowed to the distributors and adding this into sale
price to get market price or catalogue price.
15. Time of delivery: Determination of time of delivery in collaboration with the progress
department.
16. Approval of management: When the estimate is complete, it is entered into the 'Estimate form'
and submitted to the directors and sales department for dispatch of the quotation or tender.
Estimation labor cost, material cost
12. Write down the step by step procedure for estimating the direct material cost.(April/May-15)
Direct Material Cost
➢ Direct expenses include all that expenditure can be directly allocated and charged to a particular
job
➢ This expenditure can be directly allocated and charged to the manufacture of a specific product
or job and includes the scrap and waste that has been cut away from original bar or casting.
The procedure for calculating the direct material cost is as follows:
1. From the product drawing, make a list of all the components required to make the final product.
2. Calculate the volume of each component from the drawing dimensions after adding machining
allowances, wherever necessary.
3. The volume of component multiplied by the density of material used gives the weight of the
material per component. .
4. Add process rejection and other allowances like cutting allowance to get the gross weight per
component.
5. Multiply the gross weight by the rate of material per unit weight to get the cost of raw Material
per component.
Allocation of overhead charges, Calculation of depreciation cost
13. What do you understand by distribution of overhead expenses? Discuss various methods of
allocation of overhead expenses. (Nov/Dec 2016) (Nov/Dec 2018)
Explain with an example about over head cost and various bases used for absorption of overhead.
Apr/May -2019
➢ The overhead charges or on-costs cannot be directly charged to a specific job or it reproduced in
the factory.

22
➢ In industries producing single product the total overhead costs may be simply divided by the
number of items produced.
Following are some important methods of allocation of overhead costs:
1. Allocation by cost proportion.
2. Allocation by hourly rate.
3. Allocation by unit rate.
1. Allocation by Cost Proportion
This method is sub-divided into three categories:
(a) Proportional to prime cost:
➢ In this method the total overhead costs of the industry are expressed as a fraction or percentage of
the prime cost.
➢ This percentage multiplied by the prime cost of individual item gives the part of total overheads
to be allocated to that item of manufacture.
➢ The formula for calculating the percentage of overheads is:
Percentage of overheads=
Total overhead cost
Total prime cost
×100
This method of distribution of overhead costs ignores the difference in labour rates and material and
machines employed for the manufacture of different items.
(b) Proportional to direct labour cost: In this method the percentage of overhead costs to be allocated is
given by
Total overhead cost
Total direct labour cost
×100
This percentage of overheads multiplied by the direct labour cost on the manufacture of the item gives the part
of total overhead costs allocated to that item. This method is used where practically all the work is done by
hand (manually) and the wages paid to direct labour are quite uniform.
(c) Allocation proportional to direct material cost: According to this method, the percentage of overhead
cost equals the total overhead cost of the factory expressed as a fraction of the total direct material costs.
Total overhead cost
Total direct material cost
×100
The percentage of overhead costs multiplied by the direct material cost of the manufacture of the item gives
overhead costs to be allocated to that item. This method does not consider the fact that values of materials used
in different items of manufacture are different.
2. Allocation by Hourly Rate
This method is again sub-divided into two categories:
(a) By man-hour rate: The rate of overhead is obtained by dividing the total overhead costs by the total
production man-hours worked during that period.
Total overhead cost
Total direct material cost
×100

23
This factor multiplied by production man-hours used in manufacture of the item, gives the overhead costs to
be allocated to the item under consideration. This method does not take into consideration use of different types
of equipment in manufacture of different products.
(b) By machine hour rate: In this method the overhead costs are allocated on the basis of fraction of the time
used on particular machine in the manufacture of an item.
Rate of overhead per machine – hour =
Overhead expenses for specific machine
Number of machine-hours
Rate of overhead multiplied by number of machine-hours used in the manufacture of the item gives part of
total overhead costs to be allocated to that item. This method takes into account variation in type and size of
equipment, power required etc., for manufacture of different products.
This method is used where most of the work is done with machines. The on-cost for a machine is calculated by
taking into account the depreciation of machine, power consumed by the machine, building expenses on the
basis of floor area occupied by the machine and other indirect charges.
3. Allocation by Unit Rate
In this method of allocation of overhead costs, it is assumed that the overhead expenses are proportional to the
total output.
Overheads costs/ unit produced =
Total Overhead charges for the entire factory
Number of units produced
This method is applied in concerns where one type or similar products are manufactured. This method gives a
standard rate of overheads for all the components produced.
14. Write short notes on miscellaneous allowances in estimation.(Nov/Dec- 07, 11, 13) (or)
What are the various allowances made in cost estimations? (May/June- 12, 14)
Classify and explain the allowances used in calculating the standard Time (April/May 2021)
➢ A worker cannot work continuously without rest.
➢ His efficiency decreases as time passes due to fatigue etc.
➢ He also requires time for tool sharpening checking measurements and for personal calls.
➢ All these allowance are called miscellaneous allowances. The allowances amount to 15% of total
time.
➢ Miscellaneous allowances are classified as personal fatigue, tool changing of grinding, checking,
oiling and cleaning allowances, filling coolant reservoir and disposing off scraps and surplus,
stock, etc. Similarly in calculating material cost the machining allowances, flash losses in forging,
draft allowances, shrinkage allowances, etc. should be added.
15. Explain various allowances to be considered in estimation of direct labour cost.[April/May-15,
May/June-14]
➢ Observed time and rating factor are obtained during the time study of an operation or a job.
➢ Various allowances are considered in estimating the standard time for a job.
➢ These allowances are always expressed as % of Normal Time and are added to Normal Time to
compute the Standard Time.

24
Normal Time= Observed time × Rating factor
Time is time required to complete one cycle of operation (usually expressed in minutes).Standard Time
for a job is the basis for determining the standard output of the operator in one day or shift.
Standard Time = Normal Time + Allowances
Need for Allowances
➢ Any operator will not be able to carry out his work throughout the day without any interruptions.
➢ The operator requires some time for his personal needs and rest, and hence such time should be
included in standard time.
There are different types of allowances, and they can be classified as follows:
1. Relaxation Allowance:
➢ This is also known as Rest Allowance.
➢ Operator to recover from the physiological and psychological effects (Fatigue) of carrying out the
specified work and to attend to personal needs.
Relaxation allowance consists of:
a. Fatigue allowance, and
b. Personal needs allowance.
a. Fatigue allowance is intended to cater for the physiological and psychological effects of carrying
out the work. This time allowance is provided to enable to operator to overcome the effect of fatigue
which occurs due to continuous doing of the work (monotony etc.). Relaxation allowance (Fatigue
allowance and Personal needs allowance put together)is commonly 5% to 10% (of normal time).
b. Personal needs allowance: This allowance is provided to enable the operator to attend to his
personal needs (e.g. going to toilet, rest room, etc.).
2. Process Allowance:
➢ It is an allowance to compensate for enforced idleness of the worker.
o When the process is carried out on automatic machines, (the operator is idle after loading
the job on the machine).
o When the operator is running more than one machine.
Process allowance varies from one manufacturing situation to another depending on factors such as
hazardous working conditions, handling of heavy loads, strain involved, mental alertness required etc.
Generally 5% of the normal time is provided towards process allowance.
3. Interference Allowance:
➢ This allowance is also provided when one worker is working on several machines.
4. Contingency Allowance:
Unavoidable delay (e.g. waiting for raw materials, tools). Contingency allowance is 5% (maximum) or
Normal Time.
5. Special Allowances:
These allowances are a policy matter of the management, e.g. when the job is newly introduced or when
a new machine or new method is introduced, because worker takes some time to learn the new method

25
or job; Special allowance is also provided depending on the working conditions such as noise, dust, etc.
Once the normal time is obtained, the standard time can be estimated or obtained by adding all the
allowances to normal time.
Standard time = Normal time + Allowances
Estimation labor cost, material cost- allocation of overhead charges- Calculation of depreciation cost.
16. Calculate prime cost, factory cost, production cost, total cost and selling price per item from the
data given below for the year 2003-04 Rs.
Cost of raw material in stock as on 1-04-2003 25,000
Raw material purchased 40,000
Direct labour cost 14,000
Direct expenses 1,000
Factory/Works overhead 9,750
Administrative expenditure 6,500
Selling and distribution expenses 3,250
No. of items produced - 650
Cost of raw material in stock as on 31-03-2004 15,000
Net profit/item is 10 percent of total cost of the product. (Nov/Dec-17)
Solution:
For 650 units produced during 2003-04
(i) Direct material used = Stock of raw material on 1-04-2003 + raw material purchased
– Stock of raw material on 31-03-2004
= 25,000 + 40,000 – 15,000
= Rs. 50,000
ii) Direct labour = Rs. 14,000
(iii) Direct expenses = Rs. 1,000
Prime cost = 50,000 + 14,000 + 1,000
= Rs. 65,000
Factory cost = Prime cost + Factory expenses
= 65,000 + 9,750
= Rs. 74,750
Production cost = Factory cost + Administrative expenses
= 74,750 + 6,500
= Rs. 81,250
Total cost = Production cost + Selling expenses
= 81,250 + 3,250
= Rs. 84,500
Selling price = 84,500 + 10 percent of 84,500
= 84,500 × 1.10 = Rs. 92,950

26
Prime cost/item =
65,000
650
= Rs. 100
Factory cost/item =
74,750
650
= Rs. 115
Production cost/item =
81,250
650
= Rs. 125
Total cost/item =
84,5000
650
= Rs. 130
Selling price/item =
92,950
650
= Rs. 143
17. From the following data for a sewing machine manufacturer, prepare a statement showing prime
cost, Works/factory cost, production cost, total cost and profit.
Rs
Value of stock of material as on 1-04-2003 26,000
Material purchased 2,74,000
Wages to labour 1,20,000
Depreciation of plant and machinery 8,000
Depreciation of office equipment 2,000
Rent, taxes and insurance of factory 16,000
General administrative expenses 3,400
Water, power and telephone bills of factory 9,600
Water, lighting and telephone bills of office 2,500
Material transportation in factory 2,000
Insurance and rent of office building 2,000
Direct expenses 5,000
Commission and pay of salesman 10,500
Repair and maintenance of plant 1,000
Works Manager Salary 30,000
Salary of office staff 60,000
Value of stock of material as on 31-03-2004 36,000
Sale of products 6, 36,000
Solution:
(i) Material cost = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 𝑣𝑎𝑙𝑢𝑒 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 – 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
= 26,000 + 2,74,000 – 36,000
= 𝑅𝑠. 2,64,000

27
Prime cost = 𝐷𝑖𝑟𝑒𝑐𝑡 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝐷𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡 + 𝐷𝑖𝑟𝑒𝑐𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
= 2,64,000 + 1,20,000 + 5,000
= 𝑅𝑠. 3,89,000
(ii) Factory overheads are:
Rs.
Rent, taxes and insurance of factory 16,000
Depreciation of plant and machinery 8,000
Water, power and telephone bill of factory 9,600
Material transportation in factory 2,000
Repair and maintenance of plant 1,000
Work Manager Salary 30,000
Factory overheads or Factory cost 66,600
Factory cost = Prime cost + Factory expenses
= 3, 89,000 + 66,600
= Rs. 4, 55,600
(iii) Administrative/office expenses are:
Rs.
Depreciation of office equipment 2,000
General administrative expenses 3,400
Water, lighting and telephone bills of office 2,500
Rent, insurance and taxes on office building 2,000
Salary of office staff 60,000
Total 69,900
Production cost = Factory cost + Office expenses
= Rs. 4, 55,600 + Rs. 69,900
= Rs. 5, 25,500
(iv) Selling overheads are:
Commission and pay to salesmen = Rs. 10,500
Total cost = Production cost + Selling expenses
= 5, 25,500 + 10,500
= Rs. 5, 36,000
(v) Profit = Sales – Total cost
= 6, 36,000 – 5, 36,000
= Rs. 1, 00,000
18. Calculate the selling price per unit from the following data:
Direct material cost = Rs. 8,000
Direct labour cost = 60 percent of direct material cost
Direct expenses = 5 percent of direct labour cost

28
Factory expenses = 120 percent of direct labour cost
Administrative expenses = 80 percent direct labour cost
Sales and distribution expenses = 10 percent of direct labour cost
Profit = 8 percent of total cost
No. of pieces produced = 200 (Nov/Dec 2017) (Nov/Dec 2017)(Nov/Dec 2018)
Solution:
Direct material cost = Rs. 8,000
Direct labour cost = 60 percent of direct material cost
=
60 × 8000
100
= 𝑅𝑠. 4800
Direct expenses = 5 percent of direct labour cost
=
5 × 4800
100
= 𝑅𝑠. 240
Prime cost = 8,000 + 4,800 + 240=Rs. 13,040
Factory expenses = 120 percent of direct labour cost
=
120 ×4800
100
= Rs. 5760
Administration Expenses = 80 percent of direct labour cost
=
80×4800
100
= 𝑅𝑠. 3840
Sales and distribution expenses = 10 percent of direct labour cost
=
10 ×4800
100
= 𝑅𝑠. 480
Total cost = Prime cost + Factory expenses + Office expenses + Sales and distribution expenses
= 13,040 + 5,760 + 3,840 + 480
= Rs. 23,120
Profit = 8 percent of Total cost
=
8 ×23120
100
= 𝑅𝑠. 1,849.60
= Rs. 1,850 (say)
Selling price = Total cost + Profit
= 23,120 + 1,850
= Rs. 24,970
19. In a manual operation, observed time for a cycle of operation is 0.5 minute and the rating factor
as observed by the time study engineer is 125%. All allowances put together is 15% of N.T.
(Normal Time). Estimate the Standard Time. (Nov/Dec-14)
Solution:
Observed time for a cycle = 0.5 min.
Rating factor = 125%
Normal time = Observed time × Rating factor = 0.5 × 1.25 = 0.625 min.
Allowances = 15% of Normal Time

29
Standard Time = Normal Time + Allowances = 0.625 min. + (0.15 × 0.625) min.
= 0.625 min. + 0.094 min.
= 0.719 min.
= 0.72 min.
20. In a manufacturing process, the observed time for 1 cycle of operation is 0.75 min. The rating
factor is 110%. The following are the various allowances as % of normal time :
Personal allowance = 3%
Relaxation allowance = 10%
Delay allowance = 2%
Estimate the standard time.(Nov/Dec-14)
Solution:
Basic time or normal time = Observed time × Rating factor
= 0.75 min × 110% = 0.75 × 1.1 = 0.825 min.
Standard time =
Normal time + All allowances = Normal time + [3% + 10% + 2%] of normal time
= 0.825 min. + (0.15 × 0.825) min.
= 0.825 min. + 0.124 min.
= 0.949 min.=0.95 min.
Standard time is the basis for calculation of standard output (i.e., no. of components produced) in
1 day or in 1 shift (of 8 hours). Incentive schemes are based on the standard output.
21. A factory is producing 1000 high tensile fasteners per hour on a machine. The material cost is Rs.
375, labour cost is Rs. 245 and direct expense is Rs. 80. The factory on cost is 150 percent of the
total labour cost and office on cost is 30 percent of the factory cost. If the selling price of each
fastener is Rs. 1.30, calculate whether there is loss or gain and by what amount?
Solution:
For 1000 fasteners
Material cost = Rs. 375.00
Labour cost = Rs. 245.00
Direct expenses = Rs. 80.00
Factory on cost = 150 percent of labour cost
= 245 × 1.5
= Rs. 367.50
Factory cost = 375 + 245 + 80 + 367.50
= Rs. 1,067.50
Office on cost = 30 percent of factory cost
=
1,067.50 × 30
100
= Rs. 320.25

30
Total cost for 1000 fasteners = 1,067.50 + 320.25
= Rs. 1387.75
Cost per fastener =
1387.75
1000
= Rs. 1.387 = Rs. 1.39
Selling price = Rs. 1.30
As selling price is lower than total cost per fastener, the management will suffer a loss.
Loss per fastener = (1.39 – 1.3.0) = Rs. 0.09
Loss per 1000 fastener = 0.09 × 1000 = Rs. 90
22. A certain product is manufactured in batches of 100. The direct material cost is Rs. 50, direct
labour cost in Rs. 80 and factory overhead charges are Rs. 65. If the selling expenses are 45
percent of factory cost, what should be selling price of each product so that the profit is 10 percent
of the total cost?
Solution:
Batch size = 100
Direct material cost = Rs. 50
Direct labour cost = Rs. 80
Factory overheads = Rs. 65
Factory cost = 50 + 80 + 65
= Rs. 195
Selling expenses = 45 percent of factory cost
=
45 × 195
100
= Rs. 87.75
Total cost = 195 + 87.75
= Rs. 282.75
Profit = 10 percent of total cost
=
282.75 × 10
100
= Rs. 28.28
Selling price of 100 components = 282.75 + 28.28
= Rs. 311
Selling price per component =
311
10
= Rs. 3.11 = Rs. 3.15
23. A factory owner employed 50 workers during the month of November 2004, whose detailed
expenditure is given below:
(i) Material cost = Rs. 30,000
(ii) Rate of wage for each worker = Rs. 6 per hour
(iii) Duration of work = 8 hours per day

31
(iv) No of holidays in the month = 5
(v) Total overhead expenses = Rs. 15,000
If the workers were paid over time of 400 hours at the rate of Rs. 12 per hour, calculate
(a) Total cost, and
(b) Man hour rate of overheads.
Solution:
(a) Material cost = Rs. 30,000
No. of workers = 50
Duration of work = 8 hrs/day
No. of working days = 30 – 5 = 25
Total no. of work hours for the month of November 2004
= 25 × 8 × 50 = 10,000 hrs
Wage rate = Rs. 6 per hour
Labour cost = 10,000 × 6 = Rs. 60,000
Overtime paid = No. of overtime hours × hourly rate
= 400 × 12
= Rs. 4800
Total labour cost = 60,000 + 4800
= Rs. 64,800
Overhead expenses = Rs 15,000
Total cost = 30,000 + 64,800 + 15,000
= Rs. 1,09,800
(b) Total no. of man hours = 10,000 + 400 = 10,400
Man hour rate of overheads =
Total overheads
Total no.of man hours
=
15,000
10,400
= Rs. 1.44
24. Find out the production cost of per gear for a transmission unit in automobile from the following
data
Charges for forging per kg Rs. 22.5
Wrought iron used per month @ Rs. 90 per Kg 27 tonnes
Wages of operator Rs. 450/day
No of operator employed 36
Cartage/day Rs. 2,250
Deprecation of machines and tools Rs. 4500 per month
Wages of helpers Rs. 270 per day each
No of helpers employed 8

32
Salary of supervisor Rs. 45,000 per month
Packing charges for 108 gears Rs. 360
Electric charges Rs. 11700 Per month
Salary of manager and maintenance staff Rs. 1, 26, 000 per month
If 13,500 gears are to be produced per month and factory runs 26 days a month at 8 hour
shift then what should be the selling price of each gears so as to earn profit of 20
percentage of factory cost? (Nov/Dec 2021)
Solution:
Total man hour for the month (Operator) =36 employees X 26 Days X 8 Hours
=36 X 26 X 8
=7488 hours
Labour cost = Wage rate × Number of man hour
= 10 × 7488
=Rs.74, 800
Total man hour for the month (Helper) = 8 × 26 × 8
=1664 hours
Labour cost = Wage rate × Number of man hour
=10 ×1664
=Rs.16, 640
Total Labour cost = Rs.74, 800+ Rs.16, 640
=Rs.91, 440
Wrought iron used per month =27 X 1000 X 90
=Rs.2, 43,000
Total cost =Material cost + Cartage/day + Salary of supervisor +
Electric charges + Salary of manager and maintenance staff
= 91,440 + (2,250 × 26) + 45,000+ 11700 +1, 26,000
=Rs.3, 32,600
Production cost of single gear =
3,32,600
13,500
=Rs.14.63 per gear
Profit =20 percentage of factory cost
=
20
100
×
3,32,600
13,500
=Rs.2.92
=14.63 + 2.92

33
=Rs.17556
25. The catalogue price of a certain gadget is Rs. 1,050, the discount allowed to distributors being 20
percent. Data collected for a certain period shows that the selling price and factory cost are equal.
The relation between material cost, labour cost and factory on cost (overhead expenses) are in
the ratio 1 : 2 : 3. If the labour cost is Rs. 200, what profit is being made on the gadget?
Solution:
Catalogue Price = Rs. 1,050
Distributors discount = 20% =
1,050 × 20
100
= Rs. 210
Selling price = 1,050 – 210 = Rs. 840
Labour cost = Rs. 200
Material cost = 200 ×
1
2
= Rs. 100
Factory on cost = 200 ×
3
2
= Rs. 300
Factory cost = 200 + 100 + 300 = Rs. 600
It is given that selling price = Factory cost
= Rs. 600
840 = 600 + Profit
Profit = 840 – 600
= Rs. 240
Profit = Rs. 240 per gadget.
26. A factor has 25 lathes of same make and capacity and 10 CNC machining centers of same make
and capacity. Lathe occupies 70m2 and CNC machining center occupies 40m2. The factory
expenses are given below.
Description Period Amount in Rs.
Building rent and depreciation annual 70000
Direct labour annual 60000
Indirect labour and indirect material annual 50000
Depreciation charges for lathes annual 200000
Depreciation charges for CNC m/c center annual 1000000
Power consumption for lathe annual 350000
Power consumption for CNC m/c center annual 850000
Insurance for lathe annual 25000
Insurance for CNC m/c center annual 20000

34
Find out the machine hour rate for lathe and CNC m/c center if they work for 5000 hrs and 3000 hrs
respectively. (Apr/May 2018)
𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑜𝑛 − 𝑐𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟
It is the given that lathes occupy area of 70m2
and CNC occupy 40m2.
Therefore total area occupied is
45m2
.
It should be noted that building and other indirect expenses should be calculated on the basis of area
occupied by the machine.
To find machine-hour rate for lathes:
Building rent and depreciation for lathes =70000 × (
70
110
)
= Rs. 44545.45
Indirect labour and material expenses for lathes = 50000 × (
70
110
)
= Rs. 31818.18
Insurance expenses for lathes = 25000 × (
70
110
)
= Rs. 15909.09
Depreciation charges for lathes = 200000 × (
70
110
)
= Rs. 127272.72
Power consumption for lathes = Rs. 350000
Total on-cost for lathes
= Rs. 44545.45 + Rs. 31818.18 + Rs. 15909.09 + Rs. 127272.72 + Rs. 350000
= Rs. 569545.44
Total working hours of lathes = 5000 hours
Machine hour rate for lathe =
Rs. 569545.44
5000
= Rs. 113.90 per hour
To find machine hour rate for CNC:
Building rent and depreciation for CNC = 70000 × (
40
110
)
= Rs. 25454.54
Indirect labour and material expenses for CNC = 50000 × (
40
110
)
= Rs. 18181.81
Insurance expenses for CNC machine center = 20000 × (
40
110
)
= Rs. 7272.72
Depreciation charges for CNC machine center = 1000000 × (
40
110
)
= Rs. 363636.36

35
Power consumption for CNC m/c center = Rs. 850000
Total on-cost for lathes = Rs. 25454.54 + Rs. 18181.81 + Rs. 7272.72 + Rs. 363636.36 + Rs. 850000
= Rs. 1264545.43
Total working hours of CNC m/c center = 3000 hours
Machine hour rate for CNC machine center =
Rs. 1264545.43
3000
= Rs. 421.51 per hour
27. An apparel factory has a fork lift truck which is used by receiving and shipping departments. In
receiving section large rolls of fabric are handled while in shipping sections cartons of finished
parts are handled. Fork lift costs are shown in table. Fork lift spends 70% of time in shipping and
30% in receiving.
Operator salary Rs. 75000
Maintenance Rs. 15000
Depreciation Rs. 20000
Others Rs. 5000
The factory operates two production lines. One line for jeans
and the other for T shirts. Operational data per month is given below
Jeans T shirts Total
Units produced 550000 320000 870000
Direct labor hrs 90000 50000 140000
Rolls of fabric 2250 850 3100
Cartons shipped 60000 25000 85000
If the total overhead of the factory is Rs. 1850000, find fork lift expenses per unit of jeans and T
shirts. (Apr/May 2018)
Total expenses of fork lift = operator salary + maintenance cost + depreciation cost + others
= Rs. 75000 + Rs. 15000 + Rs. 20000 + Rs. 5000
Total expenses = Rs. 115000
Shipping=
70
100
×115000=Rs. 805000
Receiving=
30
100
×115000=Rs. 345000
Total expenses per unit=
115000
870000
=Rs. 0.132 per unit
Jeans=
870000
550000
=Rs. 0.6321 per unit
= 0.132 × 0.6321
= Rs. 0.08344 per unit
T shirts per unit = 0.1332 – 0.08344
= Rs. 0.04856 per unit

36
28. An electric fan is available in the market at a catalogue price of Rs. 1500. The discount allowed
to the distributor is 12 percent. Administrative and sales overheads are 80 percent of factory cost.
The direct material cost, direct labour cost and factory overheads are in the ratio of 1: 3: 2
respectively. If the direct labour cost is Rs. 300 and the central excise duty 10 percent of the selling
price, determine the company’s profit on each item.
Solution:
Catalogue Price = Rs. 1500
Discount to distributor = 1500 × 0.12 = Rs. 180
Catalogue price = Factory cost + Administrative and selling expenses +Profit + Central
excise + Discount to distributors
= Sales price + Central excise + Discount to distributor
Direct labour cost = Rs. 300
Direct material cost = Rs. 300 ×
1
3
= Rs. 100
Factory on cost = Rs. 300 ×
2
3
= Rs. 200
Factory cost = 300 + 100 + 200 = Rs. 600
Administrative and sales overheads = 80 percent of factory cost
=
600 × 80
100
= Rs. 480
Let the profit = Rs. P per item
Then selling price = 600 + 480 + P
= Rs. (1080 + P)
Excise duty = 10 percent of selling price
= (1080 + P) ×
10
100
=
1
10
× (1080 + P)
Catalogue Price = Sales Price + Central Excise + Discount to distributors
1500 = (1080 + P) +
1
10
(1080 + P) + 180
Profit P = Rs. 120 per item
28. A factory has three sections in a machine shop. During one calendar year the following details are
available :
(i) Depreciation and rent of building Rs. 8,000
(ii) Supervisory charges Rs. 20,000
(iii) Indirect labour and indirect materials Rs. 7,000
(iv) Insurance charges Rs. 5,000
(v) Other charges (given below) Nov/Dec-2019

37
Item of expenditure Section I Section II Section III
Depreciation of
machines
Rs. 5,000 Rs. 7,000 Rs. 4,000
Cost of power
consumed
Rs. 3,000 Rs. 5,000 Rs. 2,000
Area occupied as
percentage of total area
40 % 20 % 40 %
M/C hours worked 8,000 25,000 10,000
Maintenance charges Rs. 2,000 Rs. 3,000 Rs. 1,000
Find out the machine-hour rate for each section if the common fixed expenses are to be apportioned on
the basis of floor space occupied by each section.
Solution: The total expenses for Section I are as follows:
(i) Common fixed expenses such as depreciation and rent of building, supervisory charges,
indirect labour and indirect materials and insurance charges are charged on the basis of
floor area occupied.
= (8,000 + 20,000 + 7,000 + 5,000) ×
40
100
= Rs. 16,000 per year
(ii) Depreciation of machines = Rs. 5,000
Power charges = Rs. 3,000
Maintenance charges = Rs. 2,000
Total expenses = 16,000 + 5,000 + 3,000 + 2,000
= Rs. 26,000 per year.
Machine-hours worked during one year = 8,000
Machine-hour rate for Section I =
2600
800
== Rs. 3.25
For Section II:
Total cost = (8,000 + 20,000 + 7,000 + 5,000) ×
20
100
+ (7,000 + 5,000 + 3,000)
= Rs. 23,000 per year
Machine-hours worked during one year = 25,000
Machine-hour rate for Section II =
23000
25000
= Rs. 0.92
Similarly calculate the machine-hour rate for Section III = Rs. 2.30
29. Discuss how accurate cost estimation contributes to strategic decision-making. cost control, and
profitability. Illustrate the importance of costing in product pricing, budgeting, financial analysis and
performance evaluation.(AU Apr/May 2024)
1. Strategic Decision-Making

38
• Resource Allocation: Accurate cost estimation helps in allocating resources effectively. By knowing the
costs involved in various projects, products, or services, businesses can prioritize investments and
allocate budgets strategically.
• Market Positioning: Cost estimation informs decisions regarding market entry, expansion, or
diversification. Understanding production costs allows businesses to assess feasibility and profitability of
new ventures or product lines.
• Competitive Advantage: Knowing accurate costs enables businesses to set competitive prices while
maintaining profitability. It also helps in identifying cost-saving opportunities and optimizing
operational efficiencies to stay ahead in the market.
2. Cost Control
• Budget Adherence: Accurate cost estimates serve as benchmarks against which actual expenditures can
be monitored and controlled. This helps in managing budgets effectively and preventing cost overruns.
• Operational Efficiency: Cost estimation identifies cost drivers and inefficiencies in processes. With this
information, businesses can implement measures to reduce waste, optimize resource utilization, and
improve overall operational efficiency.
• Risk Management: Understanding costs helps in assessing financial risks associated with projects or
operations. It allows businesses to plan for contingencies and mitigate potential financial impacts.
3. Profitability
• Product Pricing: Cost estimation forms the foundation for setting competitive and profitable pricing
strategies. By accurately determining production costs, businesses can establish pricing that covers costs
while meeting market demands and competitive pressures.
• Profit Margin Optimization: Accurate cost estimation allows businesses to calculate profit margins
more precisely. This helps in making informed decisions about pricing adjustments, discounts, and
promotions to maximize profitability.
• Investment Decisions: Cost estimation provides insights into the profitability of investments.
Businesses can evaluate the return on investment (ROI) for capital expenditures, expansions, or
acquisitions based on projected costs and expected revenues.
Importance in Specific Areas:
• Product Pricing: Cost estimation directly influences product pricing strategies. Businesses must ensure
that product prices not only cover production costs but also contribute to overheads and generate desired
profit margins.
• Budgeting: Cost estimation is fundamental to developing accurate budgets for departments, projects, or
the entire organization. It helps in allocating funds effectively and forecasting cash flow requirements.
• Financial Analysis: Accurate cost data supports financial analysis by providing reliable information for
profitability ratios, cost-volume-profit analysis, and variance analysis. This information is critical for
assessing financial performance and making informed strategic adjustments.

39
• Performance Evaluation: Costing is integral to evaluating the performance of products, projects, or
departments. By comparing actual costs against estimated costs, businesses can identify deviations,
analyze root causes, and implement corrective actions to improve performance.
Conclusion
In summary, accurate cost estimation is pivotal for strategic decision-making, cost control, and profitability
across all levels of business operations. It enables businesses to make informed decisions about resource
allocation, pricing strategies, budgeting, financial analysis, and performance evaluation. By leveraging precise
cost data, organizations can optimize efficiencies, manage risks effectively, and enhance overall financial health
and competitiveness in the marketplace. Thus, investing in robust cost estimation practices is crucial for long-
term success and sustainability in today's dynamic business environment.

Unit – III: Introduction to Cost Estimation

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