Material cost analysis

Material cost analysis

Learning objectives of the topic

• Understand the importance of material cost estimation.
• Quantify the material usage in manufacturing
manufacturing.
• Estimate the direct material cost.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• In manufacturing, materials are the substance being
altered.
• Manufacturing adds value to material by converting the
material from a received material into a deliverable
prod ct
product.
• Materials are different for different manufacturing
p
processes:
– Sheet metals for oil can manufacturing
– CD drivers for PC assembly
– Fans for AC assembly

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• Material conversion processes include:
– Mixing,
Mixing combining
combining, separating
separating, refining
– Casting, molding
– Cutting,
g shaping,
p g forming g
– Changing properties
– Joining and assembling
– Cleaning, painting, coating, finishing
– Electronic fabrication
– packing
ki

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• Manufacturing resources (equipment, labor, capital, etc)
are consumed for the conversion of the purchased
p
material.
• About 50% of the cost of the product comes as
e penses of material that goes into the man
expenses manufacture
fact re of
the product.
• To approximate
pp the material cost for a new p
product,, it is
necessary to compare various designs and material
specifications, control material expenditure, and estimate
material requirements and costs
costs.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• Manufacturing involves changing the material to the
finished p
product,, so some amount of the startingg material
does not end up in the finished product.
• Hence, cost of all materials (in product or scrap) must be
assigned to the prod
product.
ct

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
 Material cost

• Product design has to specify materials that are part of

the product.
p
• Items that become a part of the product are called direct
material.
• Indirect materials are used for processing but are not
part of the end product.
• In assembly operations
operations, materials or components are
acquired complete and ready for assembly.
• To estimate material cost, all these components should
be gathered and costs of acquiring them are put against
them.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• For products requiring material fabrication, the estimate
of materials should include allowances for waste and
losses.
• To determine the required raw material, two quantities of
material are in
involved:
ol ed
– The amount of raw material composing the design
– The amount of raw material lost due the
manufacturing process.
• The total amount of material required to manufactured
the part is
Ss = (Sf + Lw)×(1 + Ls + Lh)

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
SS = starting material
Sf = final material or material in the product
Lw = loss of material due to waste
Ls = loss of material due to scrap p (p
(percentage)
g )
Lh = loss of material due to shrinkage (percentage)

• Waste is the amount of material to be taken from the

starting material to arrive at the final product.
• Scrap allowance is the amount of material added to
compensate for errors caused by either human or
machine malfunction.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• A fabrication process produces a product that will be
q p
installed in a mechanical equipment.
• The volume of iron required in this product is 350 cm3.
• It is estimated that 75 cm3 of iron will be wasted by the
production process.
• From historical records, the production produces about
15% of parts that are scraped due to faulty production.
production
• Then, the amount of iron to start the production with is
) ( + 0.15)) = 488.75 cm3
Ss = ((350 + 75)×(1

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• The cost of material to manufacture a part is determined
from the amount of the starting g material.
• In manufacturing operations where there is salvage
(scrap and waste), the salvage can be sold or reused in
the process,
process which
hich will
ill make up
p for the material cost
cost.
• The direct material cost can be calculated as
Cdm
d = Ss Cms - Vs
Cms : cost of purchase of material (riyals per unit)
Vs : salvage
g ((riyals)
y )
• If there is a cost associated with the disposal of the
salvage, then Vs is negative.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM