Cost components - Definitions and an example

Cost calculation formulae

Direct cost

Labor and material costs are made up of the direct material cost and direct labor cost.

• Direct labor cost

<direct labor cost> = (<setup time> * <resource cost rate>) + (<job time> * <resource cost rate> * <lot size>) / <time per>

If a sub-assembly is used multiple times in an operation plan then the setup cost is only calculated once.

• Direct material cost

Material prices are used from the price source that is defined in the calculation.

<direct material cost> = <quantity> * <price> * <lot size> / <quantity per>

Quantity is taken into account for each material line.

If your ERP system is SAP Business One, and you use the FIFO valuation method there, then Build uses the last purchase price for the calculation.

Indirect cost

The indirect costs are added to the direct labor and material costs to get the total labor and material cost.

Indirect costs are provided as a percentage of the direct cost in the calculation settings, or can be overwritten with a fixed value in the calculation. Click the coin or percentage icon to toggle between percentage or a fixed value.

Total labor and material cost

<total labor and material cost> = <direct labor cost> + <direct material cost> + <indirect labor cost> + <indirect material cost>

Sales cost

Sales, administration and shipping costs are added. They are provided as a percentage of the total labor and material cost in the calculation settings, or can be overwritten with a fixed value in the calculation. Click the coin or percentage icon to toggle between percentage or a fixed value.

<estimated cost of sales> = <total labor and material cost> + <shipping cost> + <sales and administration cost>

Sales price

The net sales price is calculated by adding the mark-up and taking any discounts into consideration.

<net sales price> = <estimated cost of sale> + <mark-up> - <discount>

The final sales price can be manually changed. The finale sales price is automatically updated when the calculation is changed, until you first manually update it. Any changes in the final sales price after the first manual update must be entered manually.

The difference of the net sales price and final sales price is displayed on the calculation result.

Example direct cost calculation

A bike frame and handle is assembled in this example. The handle is a sub-assembly, which is also produced in-house. The item structure is as follows:

Handle sub-assembly

The handle sub-assembly operation uses a technician and a machine. 

Direct labor cost = (setup time x cost rate) + (job time x resource cost rate x lot size) / time per 

Time per is set to 1 for each resource. We are producing bikes in lots of 10.

Material prices are used from the price source that is set for the calculation.

Direct material cost = quantity (for each material line) x price x lot size / quantity per

The grip is purchased in boxes. The box is the unit of measure set for this material. Each box contains 4 pieces. Two grips are required for each assembly, therefore half box is used in the operation plan.  

Quantity per is set to 1 for each material.

The labor and material cost of one lot of the sub-assembly is Direct labor cost + Direct material cost = 1630.8.

Frame and handle assembly

The bike frame and handle assembly operation uses another technician and the same machine as the handle operation. The assembly is produced in lots of 10.

Time per is set to 1 for each resource.

Quantity per is set to 1 for each material. The calculation process uses the direct material and labor costs as the base.