Estimating total cost first requires creation and input of information into a system such as a manufacturing resource planning (MRP) system. Labor hours, machine hours, dollar rates per hour for labor and machinery, overhead rates, operational routings and bills of material are all used by the system to calculate estimated or standard cost. Operational routings are the series of steps required to manufacture products including the work areas and associated hours and rates. Bills of material are parts required to assemble or fabricate higher level products. Purchased part estimates are the result of averaging a series of actual costs of purchases. A standard cost system creates estimated costs through cost rollups. Cost rollups are programs that calculate costs using the data from purchasing, routings and bills of material.
Input labor and machine dollar per hour rates for each work area into the MRP system. Calculate purchased part standard cost by averaging actual cost to purchase and input into the system.
Make operational routings for each manufactured part identifying the labor and machine hours used to manufacture parts for each step of the process. Input bills of material including the quantity required of each part to manufacture higher level parts.
Run the cost rollup program, which uses purchased costs, routings and bills of material information to create standard costs for each part in the system. Identify the finished good parts to see total estimated cost for a completed product. Total estimated cost for any part in the system is readily available in the system cost accounting area.
Use the total estimated costs for parts and multiply the costs by the quantities desired to determine total estimated cost for a contract or a proposed customer order. Consider alteration of estimates based on the size of the contract or order based on purchasing and manufacturing efficiencies that can occur on larger quantities.
Bob Turek started writing in 1994 for "The Performance Advantage" magazine. His book "Value Selling Business Solutions" draws on technology industry experiences gained from his position as director of business development for Infogain's cloud CRM for customer support operations practice. He holds a bachelor's degree in economics and psychology from Claremont McKenna College and a Master of Business Administration from the University of Southern California.