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ADMS 4245 Lecture Notes - Fixed Cost, Cost Driver, Indirect Costs

Administrative Studies
Course Code
ADMS 4245
Peter Modir

of 5
CH 11 – Design for Manufacturing
Definition of Design for Manufacturing
Manufacturing cost is a key determinant of the economic success of a product
DFM Requires a Cross-Functional Team: DFM utilizes information of several
o1) Sketches, drawings, product specifications, and design alternatives
o2) a detailed understanding of production and assembly processes
o3) estimates of manufacturing costs, production volumes, and ramp-up
oTherefore, it requires the contributions of most members of the
development team as well as outside experts.
DFM is performed throughout the development process
oWhen choosing a product concept, cost is almost always one of the criteria
on which the decision is made – accurate cost estimates finally become
available during the detail design phase of development, when many more
decisions are driven by manufacturing concerns.
Overview of the DFM Process:
it consists of five steps plus iteration: this helps the team to determine at a general level
which aspects of the design – components, assembly, or support are most costly. The
team then directs its attention to the appropriate areas in the subsequent steps.
1. Step 1: Estimate the Manufacturing Costs
a. Manufacturing cost is the sum of all of the expenditures for the inputs of
the system and for disposal of the wastes produced by the system.
i. Component Costs: the components of a product (or parts) may
include standard parts purchased from suppliers. Example of
standard parts are motors, screws, switches, etc. other components
are custom parts, made according to the manufacturer’s design
from raw materials, such as sheet steel, plastic, aluminum.
ii. Assembly Costs: the process of assembling almost always incur
labour costs and many also incur costs for equipment and tooling.
iii. Overhead Costs: Overhead is the category used to ecompass all of
the other costs.
1. Support Costs: associated with materials handling, quality
assurance, purchasing, shipping, receiving, facilities, and
equipment/tools maintenance.
2. Indirect allocations: cost of manufacturing that cannot be
directly linked to a particular product but which must be
paid for to be in business. Eg, the salary of the security
3. Indirect costs: because indirect costs are not specifically
linked to the design of the product, they are not relevant to
DFM, even though they do contribute to the cost of the
b. Fixed Cost VS. Variable Costs
i. Fixed cost: Those that are incurred in a predetermined amount,
regardless of how many units of the product are manufactured.
ii. Variable costs: those incurred in direct proportion to the number
of units produced such as labour and raw material.
c. The Bill of Materials: The BOM is a list of each individual component in
the product. The columns of the BOM show the cost estimates broken
down into fixed and variable costs. The variable costs may include
materials, machine time, and labour. Fixed cost may include specialized
d. Estimating the Costs of Standard Components
i. Comparing each part to a substantially similar part the firm is
already producing or purchasing in comparable volumes or
ii. Soliciting price quotes from vendors or suppliers.
e. Estimating the costs of custom components
i. Almost the same as standard components
f. Estimating the cost of Assembly
i. Product made of more than one part require assembly.
ii. Manual assembly costs can be estimated by summing the estimated
time of each assembly operation and multiplying by a labour rate.
iii. A popular method for estimating assembly times has been
developed over the operations and is now available as a software
g. Estimating the Overhead costs
i. Accurately estimating overhead costs for a new product is difficult,
and the industry practices are not very satisfying.
ii. Applying the overhead estimation schemes used by most firms is
simple. Estimating the actual overhead costs incurred by the firm
due to a particular product is not because it is hard to track and
assign indirect costs to a particular product.
iii. Most firms assign overhead charges using:
1. Overhead rates: also known as burden rates. They are
typically applied to one or two cost drivers. Cost drivers
are parameters of the product which are directly measured.
Overhead charges are added to direct costs in proportion to
the drivers. Common cost drivers are the cost of any
purchased materials, the cost of assembly labour, and the
number of hours of equipment time the product consumes.
2. The problem with this scheme is that it implies that
overhead costs are directly proportional to the cost drivers;
however, this can’t always be true. Eg, when the cost driver
is based on purchased materials of $50, however, if the
supplier raises the price to $60, that will imply that the
overhead cost will also have to increase, but that is wrong
3. As a result, ABC (Activity-based costing) is used. Under
this, a firm utilizes more and different cost drivers and
allocates all indirect costs to the associated cost drivers
where they fit best.
2. Step 2: Reduce the costs of components
a. Understand the process and cost drivers