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Indirect costs are the costs of those factors which can only be indirectly attributed to the manufacture of a specific product. They are sometimes called overheads or oncosts. Overhead charges can be subdivided for convenience under three headings :

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1. Works overheads : These consist of the cost of the salary of works manager, works superintendents, foreman, inspectors, operators, labourers etc. cost of cutting oil, depreciation of machines, lighting, rent of factory buildings, insurance and electricity bills etc.

2. Office overheads : These consist of the salary of office manager, office staff, postage, FAX, telephone, legal expenses, depreciation of office equipment and rent of office building etc.

3. Sales overheads : These consist of the cost of salary of all sales staff, advertising, sales commissions etc.

Therefore, it can be seen that indirect costs are the total costs of running the organization less the direct material costs and the direct labour costs. The major difficulty in dealing with indirect costs is to decide accurately how much of the total overheads should be borne by a particular component or batch of components. If this is not done reasonably accurately then the sales price of the product will be unrealistic, since

Sales price = Direct costs + Overheads + Profit

Overheads are based on past experience and in many engineering works, it is always expressed as a % of the direct labour cost. Overhead are 300% to 500% of direct labour costs.

Example 1 : A batch of 500 components is produced on a capstan lathe. The piece work rate/ piece is Rs. 2.50 and the indirect material cost/piece is Rs. 4.00. Overheads are 450% of direct labour cost. What is the total cost of the batch of component ?

Solution :

Direct material cost = 500 × Rs. 4.00 = Rs. 2,000 Direct labour cost = 500 × Rs. 2.50 = Rs. 1,250 Overheads = 450% of direct labour cost

= 450

100 × Rs. 1,250 = Rs. 5,625

(Indirect costs are overhead costs) Total cost of the batch = Rs. 2,000 + Rs. 1,250 + Rs. 5,625

= Rs. 8,875

As a means to simplify cost estimation, standard ratios have been established between material cost, direct cost (i.e. labour, equipment or machine-hour cost, power and the selling price. A typical ratio :

Material cost : Direct cost : Selling price = 1 : 3 : 9 Operational Overhead Ratio :

The ratio between the selling price and the direct cost is sometimes called the operational overhead ratio. This ratio gives an idea of the efficiency and risks involved during the operation. For companies specialized in manufacturing products using advanced technologies, the operational overhead ratios are very high.

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EVALUATIVE QUESTIONS KPRODUCTION COST ESTIMATION

1. Explain the following :

(a) Distribution of die cost on individual components. (b) Material cost in costing of cast products.

(c) Process scarp in a casting process.

2. A foundry unit produces tractor components as cast. Calculate the selling price of a component weighing 50 kgs from the following data :

(i) Material of component is cast iron with density 7.2 gms/cc (ii) Cost of molten iron at cupola = Rs. 2.50 per kg

(iii) Process scrap = 17 percent of net weight

(iv) Scrap return value = Rs. 1.10 per kg

(v) Administrative and sales overheads = Rs. 5 per casting

(vi) Agents commission = 5 percent of sales price

(vii) Profit = 10 percent of total cost

(viii) Other expenditure is given in table below :

Operation Time per Labour cost Shop overheads

component component per hour

(minutes) (Rs.) (Rs.)

Moulding and pattern making 6 0.90 3.00

Core making 8 0.80 4.00

Fettling and cleaning 10 1.00 8.00

3. How will you estimate the material cost involved in the manufacturing a casting ?

4. (a) What are the various elements considered while calculating the cost of a welded joint ? (b) Explain the terms : direct material cost and direct other expenses in costing of welded

joint.

5. Determine the cost of welding of two plates 100 × 100 × 8 mm thick to obtain a plate of dimensions 200 × 100 × 8 mm. The following data is available :

(i) Welding is done on both the sides

(ii) Electrode diameter = 5 mm

(iii) Electrode used per meter of weld = 0.500 kg

(iv) Minimum arc voltage = 30 Volts

(v) Current used = 225 Amperes

(vi) Labour charges = Rs. 10/meter of weld

(vii) Electrode price = Rs. 10/kg

(viii) Efficiency of welding machine = 50 percent

(ix) Welding speed = 2 meters/hour

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6. Determine the cost of filler material and gases consumed in welding of two plates 8 mm thick and 1.5 m long. Gas cutting is used to make 60°-V on the edges of both the plates. The cost of Oxygen is Rs. 10 per cu meter and cost of acetylene is Rs. 5 per cu meter. The filler rod costs Rs. 6.50/kg. Take other data from the tables. Density of filler metal is 10 gms/cc.

7. A rectangular frame shown in Fig. 5.28 is to be made using plates of 300 cm × 6 cm × 4 mm and 200 cm × 6 cm × 4 mm sizes. Find the cost of filler metal and gases used to make 100 frames. The following data is available for leftward welding :

(i) Dia of filler rod = 3.00 mm

(ii) Filler rod used per meter of weld = 2.10 meters (iii) Density of filler rod material = 11 gms/cc

(iv) Consumption of Oxygen/hour = 0.20 cu meter

(v) Consumption of acetylene per hour = 0.20 cu meter

(vi) Welding speed = 4.6 metres/hour

(vii) Cost of Oxygen = Rs. 80/100 cu meter

(viii) Cost of acetylene = Rs. 500/100 cu meter

Welding is to be done on both sides of the frame.

Note : Length to be welded at each corner = 2 2

6 + 6 = 8.5 mm

8. (i) What are the various losses considered while calculating the material cost for a forged component ?

(ii) Discuss the various constituents of cost of a forged component.

9. Calculate the net weight and gross weight for the manufacture of 500 levers shown in Fig. 5.29. The material weighs 7.8 gms/cc and the total losses account for 25 percent of net weight of the lever. Also calculate:

Fig. 5.28. Welded frame

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(i) Length of 3 cm diameter rod required/component.

(ii) The cost of forging 500 pieces if the material costs Rs. 80 per kg, labour cost is Rs. 5 per piece and overheads are 25 percent of material cost.

10. Estimate the cost of manufacturing high carbon steel spanner (Fig. 5.30) to be made by die forging. The following data is available :

(i) Batch size = 500 pieces

(ii) Die cost per batch = Rs. 300

(iii) Stock cutting charges = Rs. 5 per batch

(iv) Set-up and machine operation cost = Rs. 75 per batch

(v) Labour charges = Rs. 30 per batch

(vi) Density of steel = 8.5 gms/cc

(vii) Cost of high carbon steel = Rs. 80 per kg

Assume suitable allowances for calculating the weight of the component.

11. Explain the following giving examples : (a) Indirect material expenses.

(b) Indirect labour expenses. (c) Other indirect expenses.

12. What do you understand by distribution of overhead expenses ? Discuss various methods of allocation of overhead expenses.

13. Explain the following terms w.r.t. machining operations giving examples : (a) Set-up time.

(b) Handling time. (c) Unit operation time. (d) Total time.

14. What are the various allowances to be considered while calculating the total time for manufacturing a component ?

15. A m.s. bar of 40 mm diameter is to be turned as shown in the Fig. 5.31. Estimate the total time to accomplish the task.

Assume Cutting speed = 25 m/min

Feed rate = 0.2 mm/rev.