Terminology commonly used in the area of cost calculation
ABC analyses are used to sort and classify customers, products, suppliers, purchasing parts or other items according to their importance for the company. For this purpose, the items, e.g., product components, are divided into three categories or classes based on selected parameters: A, B and C. A is very important, B is important and C is less important.
The ABC analysis helps, among other things, to analyse complex projects with an easy-to-manage effort, to detect cost potentials and to increase the profitability of products or projects.
Benchmarking refers to a procedure in which one’s own products, processes, techniques and values are continuously compared with standard values or the values of the competition. The comparison criteria can be chosen arbitrarily, but typically quality, time and costs are analysed.
The objective of benchmarking is to determine what differences exist, why these differences exist and what potential for improvement exists in order to close the gaps to the top performers.
The bid/no-bid decision is the choice whether or not a company submits a bid for a tender or a request for proposal. Many various considerations go into the decision-making process. In addition to the ability to fulfil the contract at all (personnel, competence, equipment), the company must check whether a competitive price can be offered that is economically worthwhile. Strategic cost management is very helpful here.
Bottom-up estimating (also: bottom-up costing) is a technique for cost calculation. It involves estimating or calculating costs and effort for each individual work step and component within the project and then summing them up (aggregating costs). This method is very time-consuming, but when used correctly, it offers a high level of detail and, accordingly, a lot of traceability.
The bottom-up approach is only practical if detailed descriptions, designs or knowledge of the project whose costs are to be estimated are already available. However, in early phases, such as the idea and conception phase, very often only little project data is available. In this case, the top-down approach to estimating costs has proven to be successful and effective.
The break-even point is the point at which the sales revenues (income) of a product are as high as the total costs incurred (expenses). The break-even point is therefore the point at which a previous investment generates a profit.
A break-even analysis is essential for determining the profitability of products. For a valid analysis of the break-even point, the entire product life cycle should always be considered.
Brownfield describes a specific initial situation for a particular project or operation. In this case, the existing situation is the starting point for the considerations. Numerous factors must be considered that can affect the costs to be estimated. These include, for example, machines that are unsuitable for the situation, complex processes, fluctuating production quality with a high proportion of rejects, a lack of skills and technology, and logistical obstacles.
The term brownfield also refers to industrial and commercial areas that are already (partially) built on due to their previous use and may be contaminated.
Build to print is a technique and process in which a manufacturer produces products and components according to the client’s exact specifications. Usually, an engineer on the client’s side provides detailed design drawings for this purpose. The design specifications often include performance and quality requirements that the supplier must meet during manufacturing. Build to print falls under the general category of contract manufacturing and is sometimes referred to as build to suit.
Build to print projects are a good option for companies when they need components that they do not specialise in manufacturing, or when they do not have the capacity or equipment to manufacture these parts.
In build to specification, a supplier manufactures a component with prescribed parameters specifically for the customer. The extent to which the component is specified can vary. The supplier has the freedom to incorporate his own design know-how and manufacturing capabilities into the component. In this case, the responsibility and liability for the quality of the parts lie with the supplier. This approach saves the client money and time, as he does not have to map certain competences within the company. The disadvantage, however, can be a dependence on single suppliers.
Commercial off-the-shelf (also: components-off-the-shelf), or COTS for short, is the term used to describe mass-produced products that are constructed completely identically in large numbers and can be used unchanged. Such standard components are inexpensive, easy to use and quick to replace. The disadvantage here is the lack of adaptability to special needs.
A cost breakdown analysis is a procedure in which the costs of a specific product are divided into different components, so-called cost drivers, and analysed. The objective is to identify the cost drivers that the company can directly affect. In addition to a high degree of transparency, the detailed breakdown of costs also enables the identification of potentials.
Cost estimation relationships (CERs) are functional relationships between a project or product parameter (e.g., weight, quantity, quality, economics) and a cost or a time value. By using cost relationships, costs and efforts can be derived from the technical or functional description of a project/product alone.
Cost management includes all activities for cost estimation, cost planning as well as cost control and cost influence in the project. In short, cost management serves to ensure the economic success of projects and products.
The goals of cost management include improving a company’s liquidity, reducing the need for financing investments and ensuring the competitiveness of its own range of services.
Proven cost management tools include value analysis, target costing, benchmarking, should costing and life cycle costing.
Costing during development (also: costing during design) is a calculation of the costs of an individual part, an assembly, a process or a complete product that is conducted parallel to the development and design.
As an instrument of strategic cost management, the development and design-accompanying calculation enables early control and optimisation of the subsequent manufacturing costs as well as other consequential costs.
In workflow planning, cycle time (also: working cycle) refers to the period of time required for a single operation within a production process.
Design for assembly is a process in which products are designed in such a way that they can be assembled as simply as possible. This can be achieved on the one hand by reducing the number of parts within an assembly and on the other hand by improving the handling of the parts. If a product contains fewer parts, it takes less time to assemble. If the parts are also designed with features that make them easier to handle, move, align, and insert, assembly time and assembly costs are further reduced.
Design for manufacturability (also: design for manufacturing) describes the process of designing or constructing a product in such a way that the manufacturing process is facilitated and thus manufacturing costs are reduced. Design for manufacturability allows potential problems to be addressed at the design stage, where the potential for savings is greatest.
Design to cost describes a series of methods from the field of cost management for optimising and reducing costs in the context of product development and manufacturing. These include target costing and value analysis.
The goals of the design to cost approach are the optimisation of process costs, the reduction of product costs as well as the reduction of life cycle costs and the total cost of ownership. It is important to implement this management technique already in the idea and concept phase in order to obtain the greatest possible leverage for cost improvements.
Greenfield describes a specific starting situation for a particular project or operation. In this case, optimal framework conditions are assumed as a starting point. Numerous factors must be considered that can affect the costs to be estimated. These include, for example, optimal machines, fast processes, high production quality with little rejects, sufficient skills, and technologies as well as optimal lot sizes.
Life cycle costing (LCC for short) is a cost management method that considers the costs of a product over its entire life (product life cycle), i.e., “from the cradle to the grave”.
Life cycle costing is used to analyse or evaluate the profitability of a product. Life cycle costs include the costs for planning, development, design, procurement, manufacturing, logistics, distribution, usage, maintenance and disposal.
The make or buy decision (also: in-house production or external procurement) is the decision whether a specific service or a specific product should be produced in-house or purchased from a supplier. The decision criteria include, for example, time, costs, competence, quality, resources and risks.
The mean time between failures (MTBF for short) is the term for the expected operating time of a repairable unit between two successive failure events. In other words, the MTBF is a parameter for the average reliability of assemblies, devices and systems.
The mean time to repair (MTTR for short) is the term for the average repair time of assemblies, devices, and systems after a system failure. In other words, the MTTR indicates how long it takes on average to restore the functionality of a unit. It is therefore an important parameter for the system availability.
Performance pricing (also: cost regression analysis) is a statistical approach to estimating the price of products and product groups on the basis of value-related criteria (value drivers). Mathematical correlations are established between the price of a product and its product-specific (technical) characteristics.
Performance pricing can be used to analyse the appropriateness of the prices of products and product groups in relation to their performance. Among other things, this method helps to identify outliers and reveal cost reduction potential.
The life cycle of capital goods covers the entire life of a product “from the cradle to the grave”. The life cycle phases include planning, development, design, procurement, manufacturing, logistics, distribution, usage, maintenance and disposal. All these phases must be considered within the framework of so-called life cycle costing in order to be able to validly assess the profitability of a specific product.
Should costing is a purchasing process that determines what the total cost of a product to be purchased should be if it were produced under optimal conditions or with maximum efficiency. Numerous factors, such as labour, material, overhead and profit margin, play a decisive role here.
A should cost analysis is often a very good basis for negotiating with suppliers to reduce purchase prices by showing potential for optimisation in manufacturing and distribution.
Target costing is a market- and customer-oriented cost management method in which the maximum permissible costs for a product or individual components are determined. The target costs are always based on the competitiveness on the market and the willingness to pay of the targeted customers. Instead of asking what it costs to manufacture a product, one refers to the guiding question “What may the production cost?”. This results in a cost framework that must not be exceeded.
Within the framework of target costing, it becomes clear in which areas or processes savings must be made in order to achieve the target costs.
Top-down estimating (also: top-down costing) is a technique for estimating costs. Here, the calculation is made from the “broad to the detailed”. This means that the costs are broken down (deduced) step by step from the superordinate to the specific or to the individual item, as required. This method is particularly convincing due to its speed of implementation. The top-down approach is very well suited for early phases in which the information on the project or product is still rather limited. It is also suitable for situations in which essential detailed information is missing, such as requests for quotations to suppliers.
The quality of the top-down approach depends very much on how the higher-level costs are determined. Often analogies and expert estimates are used, which run the risk of being intransparent, not very comprehensible and superficial. The use of (company-internal) historical project and product databases to derive costs is also common. However, this requires the existence and continuous maintenance of such a database. Top-down costing with the help of a universal parametric cost model, which does not require the use of databases, has proven to be more efficient and safer and is therefore also ideally suited for the evaluation of new technologies.
The total cost of ownership (TCO for short) considers not only the one-off costs for the acquisition and disposal of products, but also ongoing direct and indirect (hidden) costs over the entire product life cycle. Direct recurring costs are incurred, for example, for maintenance, training, purchased services and depreciation. Indirect recurring costs, on the other hand, are not directly related to an investment. They can arise, for example, from the disruption of work processes or unproductive use.
Determining the total cost of ownership (TCO) is an important basis for answering business management questions. These include purchasing and investment decisions, comparisons of solutions and alternatives, and the selection of suitable suppliers.
4cost’s universal parametric cost model is based on over 1.1 million data sets from all industries and technologies, which have been continuously collected, validated, and expanded since 1992. With the help of hundreds of multidimensional correlation and regression analyses, numerous cost relationships (CERs) were determined from these data sets and transferred into a universal mathematical model.
The parametric model of 4cost enables the user to estimate products and projects independent of technology and industry – just by entering product-technical, economic, quantitative and qualitative parameters.
Value analysis (also: value engineering) is a function- and benefit-oriented procedure that deals with the design of a product as well as the associated processes in the context of value enhancement.
The goals of value engineering include cost savings, product improvements, process innovations and benefit enhancements. Value analysis can be used for existing products as well as for new developments.
The typical process of a value analysis comprises six steps:
- Prepare, define and plan the project
- Collection of data
- Cost and functional analysis
- Creation of solutions
- Evaluation of solutions
- Realisation of the best solution