Costing Techniques

Costing Techniques

Any engineering company will incur a variety of costs. These will typically include:

·         rent for factory and office premises

·         rates

·         energy costs (including heating and lighting)

·         material costs

·         costs associated with production equipment (purchase and maintenance)

·         salaries and National Insurance

·         transport costs

·         postage and telephone charges

·         insurance premiums.

Given the wide range of costs above, it is often useful to classify costs under various headings, including fixed and variable costs, overhead and direct costs, average and marginal costs, and so on.

In order to be able to control costs, it is, of course, vital to ensure that all of the costs incurred are known. Indeed, the consequences of not being fully aware of the costs of a business operation can be dire!

This section examines a number of different methods used by businesses to determine the total cost of the product or service that they deliver. The prime objective of these techniques is that of informing commercial decisions such as:

• how many units have to be produced in order to make a profit?
• is it cheaper to make or buy an item?
• what happens to our profits if the cost of production changes?
• what happens to our profits if the cost of parts changes?