“Material plus labour plus a margin” has quoted a great many parts, and nearly all of them come out cheaper on paper than on the invoice. Not because the numbers are wrong, but because whole layers are missing — and the missing ones are those you do not see until the product is in series.
“Material plus labour plus a margin.” Those three lines have quoted a great many parts, and nearly all of them come out cheaper on paper than on the invoice. Not because the numbers are miscalculated, but because whole layers are missing, and the missing ones are precisely those you do not see until the product is in series.
The unit cost of an industrial product has six layers. Everybody calculates the first two. The third is calculated wrongly almost every time. And the last three get settled with a round percentage nobody has ever checked.
An incomplete cost breakdown does not produce a 3% error. It produces a margin that looks like 30% and is 18%, and you do not find that out in the quotation: you find it out six months later, looking at why the line is not delivering what the business case promised.
Treating overhead as a percentage of direct cost hides precisely the lever most used in a negotiation: if volume goes up, unit cost goes down, and if it goes down, it goes up. With a fixed percentage, the cost breakdown says the same thing at 40,000 parts as at 200,000 — which is exactly the conversation you need to be able to have with a customer.
The starting values are those of an ordinary injection-moulded housing. Replace them with yours: everything recalculates as you type. Nothing is sent anywhere.
A cost breakdown is for deciding, and deciding means knowing what happens if things do not go as planned. The two variables that move on their own — with nobody in the company doing anything — are the volume the customer ends up buying and the raw material price. This table recalculates with the values above.
| Scenario | Cost | Margin | Difference |
|---|
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What usually surprises people when they look at the two rows together: raw material moves cost far more than volume does in a part with a high material content. Negotiating volume when the problem is the price of the pellets is spending the conversation on the wrong lever.
Before ordering the tooling. Afterwards the transformation cost is fixed and the margin with it: the only thing left to decide is the price, and the market decides the price. The window in which a cost breakdown is any use closes with the mould purchase order.
The six-layer model is one way of organising something cost accounting has been dealing with for decades. These are the underlying references.
The work that called into question allocating indirect costs by percentage. Its central argument is that of the sixth layer: fixed costs are not allocated in proportion to direct cost, but according to what each part number actually consumes.
The DFMA reference work. It quantifies how much of the final cost is determined during design, which is the argument for calculating the breakdown before freezing the product.
The practice of starting from the price the market will bear and the required margin in order to derive the maximum admissible cost, instead of calculating cost and adding a margin. It reverses the direction of the breakdown and is what lets you use it to decide.
It challenges unit cost as a decision criterion when there is a bottleneck: what matters then is not the cost of the part but how much of the limiting resource’s time it consumes.
It treats the cost of delay as a first-order economic variable. Useful when the decision is not only what the part costs, but what it costs to be late having it.
The source for cycle, shrinkage and scrap figures is the material supplier and the moulder, not a general table. A breakdown built on textbook values rather than the real process is an estimate dressed up as a calculation.