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Job Quotes & Economy Issues: Understanding Methods for Cost Estimates

Learn how to provide accurate job quotes by understanding various methods for cost estimation and addressing present economy problems. Explore historical data and calculate quotes with overhead, labor, material costs, and profit margins. Consider the time value of money and economic factors in decision-making.

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Job Quotes & Economy Issues: Understanding Methods for Cost Estimates

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  1. CTC 475 Review • Cost Estimates • Balance Statement • Snapshot in time • Income Statement • Over a time period

  2. CTC 475 Job Quotes & Present Economy Problems

  3. Objectives • Know how to give job quotes • Understand how to identify a present economy problem • Know how to work present economy problems

  4. Job Quotes • Rate per Direct Labor Hour • Percentage of Direct Labor Cost • Percentage of Prime (Labor+Matl) Cost

  5. Job Quotes Must Prorate: • Labor • Material • Overhead

  6. Job Quotes Example – Historical Data

  7. Job Quotes Example • Determine quote using all 3 methods for a job that will need: • 40 hours of direct labor and • $850 of direct material

  8. Method 1: Rate per Direct Labor Hour • Distribute overhead by labor hours: • Rate = Ovhd/Labor Hrs. = $360,000/48,000 • =$7.50 per direct labor hour

  9. Method 1: Rate per Direct Labor Hour – Job Quote

  10. Method 2: Rate per Direct Labor Cost • Distribute overhead by labor cost: • Rate = Ovhd/Labor Cost = $360,000/$480,000 • =75%

  11. Method 2: Rate per Direct Labor Cost – Job Quote

  12. Methods 1 & 2 • Yield same result if the rate per direct labor hour is average labor rate

  13. Method 3: % of Prime Cost • Distribute overhead by prime cost: • Rate = Ovhd / Direct Labor + Direct Material Cost = $360,000/($480,000+$600,000) • =33.3%

  14. Method 3: Rate per Prime Cost – Job Quote

  15. Method 3 • Gives different answer than method 1/2

  16. Different companies use different methods • Most common is method 1 • Consulting firm I worked at– similar to method 2

  17. Cost Centers • Average overhead rates may not work if you make products that are very different • Can split costs among departments • i.e. architect dept., engineering dept.

  18. Job Quotes (w/ profit) • Our previous examples did not include profit • Profit must be added • Assume a job requires $500 worth of material and 30 direct labor hours (@ $6/hr). Using a $3/hour overhead rate and a profit margin of 20%, determine the job quote

  19. Job Quote Example (w/profit)

  20. Time Value of Money • Most of this course is based on the fundamental concept that money has a time value • Must take this concept into account since projects have different cash flow patterns at different times

  21. Present Economy Problems • Time is not a significant factor

  22. Conditions: • No investment of capital • Long-term costs are the same for all alternatives • Alternatives have identical results

  23. Example-Present Economy • A metal part can be machined on an engine lathe (one at a time) or turret lathe (many at a time) Material costs are the same regardless of the machine used. • Parts are produced in batches according to the customer’s order • Based on the following cost data, what machine should be used for order sizes of 25, 100 and 500 units?

  24. Cost Data

  25. Turret Lathe Costs

  26. Engine Lathe Costs

  27. Summary • Turret lathe costs less per unit but has a high setup cost • Engine lathe costs more per unit but has no setup costs When do I use which machine?

  28. Comparison Costs Switchover occurs somewhere between 25 and 100 units (n=1 setup)

  29. Determine breakeven point-Math • 2.10x+48=3.45x • x=35 units (assumes N=1 setup)

  30. Determine breakeven-graphically

  31. Next lecture • Time value of $ • Simple vs. Compound Interest • Single Sum-Future Worth • Single Sum-Present Worth

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