Cost models are a very complex set of equations that can be basically explain very simply, Rate X Usage. This explanation is a great training aid and helps win over skeptics.
This all boils down to RATE X USAGE. Pretty simple right. How can it be so simple? Let’s look an everyday application of this principle.
Example 1
You want to paint your room a different color. You estimate the USAGE as 5 Gallons. You go to the store and you find the paint you want at $30 per Gallon (RATE). You know it should take a painter about 3 hours to complete (USAGE) and he charges $50 an hour (RATE).
| Rate | Usage | Total | |
| Material (Paint) | $30 / Gallon | 5 Gallons | $150 |
| Labor (Painter) | $50 / Hr | 3 Hours | $150 |
| Total | $300 |
This works for much more complex models.
Net and Gross are USAGES and Material Cost per UoM is the Rate.
| Description | Gross Usage | Net Usage | UoM | Material Cost per UOM | Material Sub Total | Scrap Reclaim Rate | Scrap Credit | Total Material Cost |
| Stainless Steel | 1.00 | 0.75 | Pounds | $2.00 | $2.00 | $0.20 | $0.05 | $1.95 |
Cycle Time is USAGE while Fixed, Variable, and Indirect are RATES.
| Description | Size | Cycle Time (hours/pc) | Fixed Rate
($/Hr) |
Variable Rate ($/Hr) | Indirect
($/Hr) |
Total Machine Cost ($/PC) |
| Injection Mold | 50 Ton | 0.0083 | $4.00 | $8.00 | $15.00 | $0.224 |
This very simple explanation helps breakdown the walls with the skeptics.
Gerald (Jerry) Collins
Owner and Founder of Society of Cost Engineers
Great stuff!