Post 152 –by Gautam Shah
Costing (cost finding) is a tool to derive the cost of a product, providing a service, performing a function, or operating a department. Some of these are historical facts -historic costs such as –How much did it cost? -while others are predictive -budgetary costs such as –What will it cost?
Cost has relevance primarily to the person, who wishes to acquire or dispose off the item. But often a person to assess the ‘value’ of an object, wish to determine its worth through the costing.
Cost of a product is the total expenditure (cost of raw materials, labour, rent for plants, and producers’ profit etc.) incurred to produce or procure an item, or its exact replica. Costing can be conducted through two routes: cost analysis and rate analysis.
⊗ COST ANALYSIS: take into consideration all factors that form an item or service. It has one to one relevance. Cost analysis is more effective, for whole items, that is when an item is at a design or conceptual stage, and its parts have not yet been perceived. Yet it requires fairly clear perception of the system. Unless external conditions change a product, the cost analysis is specific, fairly stable, and may not need frequent revisions.
⊗ RATE ANALYSIS: is in a way a comprehensive application of various costs (arrived through cost analysis). Unlike cost analysis the rate analysis takes into consideration the optimum costs of production or supply (economics of volume, batch sizes, packing unit), wastage, residues, etc.
Items that have not been well detailed, or vaguely or partially conceived, various cost parameters like cost per unit of length, area, volume, or unit of the entity derived from known situations, are applied. Often cost of a known thing is considered a typical rate and applied to nearly similar things, with accommodation of the variations, as plus or minus factors. Costing done through rate analysis provides a generalised picture. Rate analysis is preferred for task-based items (assignments that have universal identity).
External conditions affect a rate, extensively and often unpredictably. Costings made through rate analysis need to be continuously improvised.
Cost analysis and rate analysis have very thin differentiation, so some consider them to be the same.
Designers’ specify-choose entities, or increase or decrease their use by predicting the costs. Designers develop their own cost determination methods, appropriate for the jobs they handle, and for types of items specified in their projects. Input data like market rates for materials, parts, components, labour etc. are continuously updated or sought as and when estimates are to be prepared. Updating feedback is also available through the historic estimates conducted on completion of a project.
In design offices predictive cost analysis is made through Rate analysis. Average prices of all commonly used materials, operations, etc. are collected routinely, reformatted and stored. These are presumed as standard rates, and form the basis for the cost analysis.
To simplify the process of cost analysis, number of items and their individual rates or prices are reduced by approximation (through definition of a factor for variation) in quantity and quality.