PLANT DESIGN AND ECONOMICS (6) Zahra Maghsoud TOTAL PRODUCT COST - - PDF document

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PLANT DESIGN AND ECONOMICS

Zahra Maghsoud

(6)

TOTAL PRODUCT COST

 Total product costs are commonly calculated on one of three

bases:

 daily basis  unit-of-product basis  annual basis

 The annual cost basis is probably the best choice for

estimation of total cost.

 The best source of information for use in total-product-cost

estimates is data from similar or identical projects.

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BREAKDOWN OF TOTAL PRODUCT COST

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Total Product Cost (TPC)

Manufacturing costs (operating or production costs) General expenses (sare) (sales, administr., research, engng) Fixed charges

Variable production costs (Direct production costs)

• Raw materials
• Utilities
• Operating labor
• maintenance& repairs
• operating supplies
• Laboratory charges
• direct supervision & clerical labor(
• patents& royalties
• Depreciation
• Local taxes
• Insurance
• Rent
• Interest

General plant overhead

• Payroll overhead
• social security
• retirement plans
• packaging
• medical services
• safety& property protection
• Restaurants & recreation facilities
• storage facilities
• Administrative costs
• executive salaries
• Clerical wages
• Legal fees
• office supplies
• Communication
• distribution& selling costs
• sales offices
• Sales staff
• Shipping
• Advertising
• research& development

Plant overhead

Manufacturing Costs

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 Direct production costs include expenses directly associated

with the manufacturing operation.

 Fixed charges are expenses which remain practically constant

from year to year and do not vary widely with changes in production rate.

 Plant-overhead costs are for hospital and medical services;

general plant Maintenance,… .These costs are similar to the basic fixed charges in that they do not vary widely with changes in production rate.

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 The amount of the raw materials can be determined from

process material balances.

 In many cases, certain materials act only as an agent of

production and may be recoverable to some extent. Therefore, the cost should be based on the amount of raw materials actually consumed as determined from the overall material balances.

 Direct price quotations from prospective suppliers are

preferable to published market prices.

DIRRCT PRODUCTION COSTS 1-Raw Materials DIRRCT PRODUCTION COSTS 1-Raw Materials

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 Freight or transportation charges should be included in the

raw-material costs.

 Bulk shipments are cheaper than smaller-container

shipments, but they require greater storage facilities and inventory.

 In chemical plants, raw-material costs are usually in the range

• f 10 to 50 percent of the total product cost.

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 In general, operating labor may be divided into skilled and

unskilled labor.

 For chemical processes, operating labor usually amounts to

about 15 percent of the total product cost.

 A 0.2 to 0.25 power of the capacity ratio when plant

capacities are scaled up or down is often used for calculating labor requirements .

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DIRRCT PRODUCTION COSTS

2-Operating Labor

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 For calculating operating labor:  First, a process step is defined as any unit operation, unit

process, or combination thereof, e.g., reaction, distillation, evaporation, drying, filtration, etc.

 Once the plant capacity is fixed, the number of employee-

hours per ton of product per step is obtained from Fig. 6-8

DIRRCT PRODUCTION COSTS

2-Operating Labor

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DIRRCT PRODUCTION COSTS

2-Operating Labor

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 Example 6 Estimation of labor requirements. Consider a

highly automated processing plant having a capacity of 100 tons/day of product and requiring principal processing steps

• f heat transfer, reaction, and distillation. What are the

average operating labor requirements for an annual

• peration of 300 days?

DIRRCT PRODUCTION COSTS

2-Operating Labor

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Calculating the man-hour for a project

١١  Step 1  Look at the calendar for the time period in question. For an annual budget,

remove all non-working days from the work year. Do the same for a project planned to be completed over a shorter period of time.

 Step 2  Assume you have a 12-week project with employees working a 10-hour day,

five days a week. There are two national holidays in the time period when your employees will not work. There are five employees on the job.

 Step 3  Multiply the five-day work week by 12 weeks: 12 by 5 = 60. Subtract the two

holidays for 58 days. Multiply the number of work days by 10 hours per day: 58 by 10 = 580--these are the project hours per employee.

 Step 4  Multiply the per-employee man hours by the number of employees on the

job: 580 by 5 = 2,900. There are 2,900 total man hours assigned to this project.

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 a general rule of thumb:

DIRRCT PRODUCTION COSTS

2-Operating Labor

example Labor requirements (employee-hours/ton of product) Processing ethylene oxide 1/3 to 2 Fluid polyethylene 2 to 4 solid-fluids coal briquetting 4 to 8 solid

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DIRRCT PRODUCTION COSTS 3-Direct Supervisory and Clerical Labor

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 The necessary amount of this type of labor is closely related

to the total amount of operating labor, complexity of the

• peration, and product quality standards.

 The cost for direct supervisory and clerical labor averages

about 15 percent of the cost for operating labor.

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DIRRCT PRODUCTION COSTS 4-Utilities

A more detailed list of average rates for various utilities is presented in Appendix B

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 For Steam requirements an allowance for radiation and line

losses must be made.

 Electrical power requirements should be increased by a factor

• f 1.1 to 1.25 to allow for line losses and contingencies.

 As a rough approximation, utility costs for ordinary chemical

processes amount to 10 to 20 percent of the total product cost.

DIRRCT PRODUCTION COSTS 4-Utilities DIRRCT PRODUCTION COSTS 5-Maintenance and Repairs

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 These expenses include the cost for labor, materials, and

supervision.

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DIRRCT PRODUCTION COSTS 6-Operating Supplies

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 Items such as lubricants, test chemicals, and similar supplies

cannot be considered as raw materials or maintenance and repair materials, and are classified as operating supplies.

 The annual cost for this type of supplies is about 15 percent

• f the total cost for maintenance and repairs.

DIRRCT PRODUCTION COSTS 7-Laboratory Charges

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 The cost of laboratory tests for control of operations and for

product-quality control is covered in this manufacturing cost.

 For quick estimates, this cost may be taken as 10 to 20

percent of the operating labor.

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DIRRCT PRODUCTION COSTS 8-Patents and Royalties

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 A certain amount of the total expense involved in the

development and procurement of the patent rights should be borne by the plant as an operating expense.

 These costs are usually amortized over the legally protected

life of the patent.

 A rough approximation of patent and royalty costs for

patented processes is 0 to 6 percent of the total product cost.

DIRRCT PRODUCTION COSTS 8-Patents and Royalties

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FIXED CHARGES

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 Certain expenses are always present in an industrial plant

whether or not the manufacturing process is in operation.

 Costs that are invariant with the amount of production are

designated as fixed costs or fixed charges. These include costs for depreciation, local property taxes, insurance, and rent.

 As a rough approximation, these charges amount to about 10

to 20 percent of the total product cost.

FIXED CHARGES 1-Depreciation

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 A decrease in value is assumed to occur throughout the usual

life of the material possessions. This decrease in value is designated as depreciation.

 The annual depreciation rate for machinery and equipment

• rdinarily is about 10 percent of the tied-capital investment,

while buildings are usually depreciated at an annual rate of about 3 percent of the initial cost.

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FIXED CHARGES 2-Local Taxes

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 The magnitude of local property taxes depends on the

particular locality of the plant and the regional laws.

 Annual property taxes for plants in highly populated areas are

• rdinarily in the range of 2 to 4 percent of the fixed-capital

investment.

 In less populated areas, local property taxes are about 1 to 2

percent of the tied-capital investment.

FIXED CHARGES 3-Insurance

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 Insurance rates depend on the type of process being carried

• ut in the manufacturing operation and on the extent of

available protection facilities. On an annual basis, these rates amount to about 1 percent of the fixed-capital investment.

 Annual costs for rented land and buildings amount to about 8

to 12 percent of the value of the rented property.

4-Rent

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PLANT OVERHEAD COSTS

٢۵  Hospital and medical services  General engineering  Safety services  Cafeteria and recreation facilities  General plant maintenance and overhead  Payroll overhead including employee benefits  Control laboratories  Packaging  Plant protection

Nonmanufacturing machinery, equipment, and buildings are necessary for many

• f the general plant services are part of the plant-overhead costs

 Janitor and similar services  Employment offices  Distribution of utilities  Shops  Lighting  Interplant communications

and transportation

 Warehouses  Shipping and receiving

facilities

PLANT OVERHEAD COSTS

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 These charges are closely related to the costs for all labor

directly connected with the production operation.

 The plant-overhead cost for chemical plants is about 50 to 70

percent of the total expense for operating labor, supervision, and maintenance.

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GENERAL EXPENSES 1-ADMINISTRATIVE COSTS

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 Salaries and wages for administrators, secretaries, accountants,

stenographers, typists, and similar workers are part of the administrative expenses, along with costs for office supplies and equipment, outside communications, administrative buildings, and other overhead items related with administrative activities.

 For a quick estimate, the administrative costs may be

approximated as 20 to 30 percent of the operating labor.

GENERAL EXPENSES 2-DISTRIBUTION AND MARKETING COSTS

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 Salaries, wages, supplies, and other expenses for sales offices;

salaries, commissions, and traveling expenses for salesmen; shipping expenses; cost of containers; advertising expenses; and technical sales service.

 These costs for most chemical plants are in the range of 2 to 20

percent of the total product cost.

 The higher figure usually applies to a new product or to one sold in

small quantities to a large number of customers. The lower figure applies to large-volume products, such as bulk chemicals.

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GENERAL EXPENSES

3-RESEARCH AND DEVELOPMENT COSTS

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 Research and development costs include salaries and wages

for all personnel directly connected with this type of work, fixed and operating expenses for all machinery and equipment involved, costs for materials and supplies, direct

• verhead expenses, and miscellaneous costs.

 In the chemical industry, these costs amount to about 2 to 5

percent of every sales dollar.