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Debunking the Completity of Cost Models

Rate and Usage (Debunking the complexity behind cost models)

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

1 Comment

  1. Mark

    Great stuff!

    Reply

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