Cost Analysis and Estimating for Engineering and Management

Cost Analysis and Estimating for Engineering and Management Chapter 2 Labor Analysis © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -1

Overview l Labor and Labor Costs -Determining Costs -Labor Hour l Time Study l Work Sampling l Wages and Fringe Benefits -Incentive Pay © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -2

Labor l Direct Labor -“Touches” the Product -Changes – Adds Value to the Product l Indirect Labor -Supports Direct Labor Efforts l Direct Labor Accounts for About 15% of the Product Cost © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -3

Labor Costs l Worker Pay -Wages -Fringe Benefits l Equipment Costs -Capital Cost -Operating Costs © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -4

Determining Costs l Products in Production -Historical Cost Records -Measurement of Time -Clock Time vs. Productive Time l Proposed Products -Need an Estimate l Labor Cost = Time x Wage © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -5

Labor Hour l One Worker Working for One Hour l Labor Year 52 Weeks x 40 Hours = 2080 Hours l Labor Month 2080 / 12 = 173. 3 Hours l Should Be Time Working NOT Time at Work © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -6

Motivation l Incentive Pay -More Production = More Pay -Requires “Fair” Standards -Leads to Other Problems l Non-Incentive -Still Need to Know How Much Time a Job Should Take (Standard Time) l Standards Are Needed for Estimates © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -7

Ergonomics l Medical, Psychological & Engineering l Human / Machine / Operation Interface l Repetitive Motion Injury l Legal and Moral Issue l Financial Issue Injury Prevention Costs Less than Injuries © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -8

Time Study l Founder and Pioneers -Frederick W. Taylor -Frank & Lillian Gilbreth l l Movie “Cheaper By the Dozen” Composed of 2 Parts -Analyze and Optimize the Operation -Measure the Time and Compute the Standard © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -9

Advantages of Time Study l System for Estimating Costs l Justification for Methods Improvement l Reduction of Operation Costs l Improvement of Engineering Design l Information for Managing Productivity © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -10

Procedure for Time Study 1. 2. 3. 4. 5. Methods Analysis and Improvement Record Info. About the Operation Separate Operation into Elements Record Time for Elements Rate Performance © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -11

Procedure for Time Study 6. 7. 8. 9. Convert to Normal Time Determine Allowances Calculate Standard Time Express Standard Time in Appropriate Terms © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -12

Methods Analysis l Is the Job Ready for Timing? -Is the Physical Set-up Correct? -Is the Layout Efficient? -Are the Proper Tools & Equip. Used? -Is the Product Produced Correctly? -Is the Motion Pattern Optimized? © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -13

Recording of Information l Sketch Process Layout l List Elements -Short as Possible (but Time-able) -Have Identifiable Start & End Points -Separate Operator & Machine Elements -Separate Constant & Variable Elements © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -14

Example of Layout Sketch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -15

Taking the “Time Study” l Stopwatch -Continuous vs. “Snap-Back” Methods l Performance Rating -Trained Observer -Subjective Comparison -Observed Operator to Typical Operator Working at Normal Circumstances © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -16

Allowances l Personal l Fatigue l Delay l Together PF&D (in Percent) l Convert to Factor Eq 2. 2 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -17

Analyzing the Study l Find Average Time for Each Element l Multiply by Performance Rating to Obtain “Normal Time” l Multiply by Allowance Factor to Obtain “Standard Time” © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -18

Time Study Example Part 1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -19

Time Study Example Part 2 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -20

Time Study Example Part 3 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -21

Work Sampling l Used for General Purposes: -Estimating Costs -Scheduling -Labor Requirements -Monitoring and Managing Performance l Statistical Technique © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -22

Compared to Time Study l Multiple Workers / Machines l Study Large Area l Can Handle Long Cycle Times l Less Study Time Required (Lower Cost) l Less Disruptive of Work l Reduces Performance Issues © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -23

About Work Sampling l Determines Proportion of Time Spent on Predetermined Activities l Based on Probability & Statistics -Random, Discrete Observations -Sufficient Number of Observations -Representative of Distribution of Population © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -24

Fundamentals l Proportion of Time Spent on Activity i P’i = Ni / N Eq 2. 6 l Need to Know (Assume or Specify) -How Close Does P’i Need to Be to Pi -How Confident Do We Want to Be That the Sample Interval Encompasses the Actual Value l Need to Determine Z for the Desired Confidence from the Statistics Table © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -25

Normal Curve Fig. 2. 4 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -26

Values for Z Area Between Limits (%) -Z to +Z Area Outside Limits (%) 68 1. 000 32 90 1. 645 10 95 1. 960 5 99 2. 576 1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -27

Preliminary Sampling l Uncovers Potential Problems l Refines Activity Definitions l Helps “Sell” the Sampling Study l Provides an Estimate for P’i © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -28

Determining Sample Size l Obtain Z for Desired Confidence l Determine Confidence Interval I l Estimate Sample Proportion P’i l Compute Ni for Each Activity l Select the Largest Ni as N for the Complete Study © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -29

Calculating Ni Eq 2. 9 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -30

Conducting the Full Sampling l Spread the N Observations Evenly Over the Study Days l Distribute Each Day’s Observations Randomly through the Day l Determine Rating and PF&D Factors l Obtain the Total Units Produced During the Study (Np) © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -31

Standard Time l Compute the Standard Time -Do Not Include Idle Activities Eq 2. 10 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -32

Considerations for Sampling l Explain and Sell Prior to Starting l Appropriately Isolate Studies l Use as Large a Sample Size as Practical l Observe at Random Times l Conduct the Study Over a Long Period © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -33

Other Methods to Determine Time l Labor Hour Reports/Time Cards/Job Tickets -Objective: Time Job SHOULD Take -Span Time Records Only -Requires “Adjustment” -Collected into Labor-Hour Summary © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -34

Other Methods to Determine Time l Similar Products -Use Actual Data -Decompose Times by Components Reassemble Times for New Product -Can Ratio Actual Times by Ratio of Product Complexities © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -35

Other Methods to Determine Time l Engineering Performance Data -Micro-Motion Systems (e. g. MTM) -Some Capable of Producing Standards l In-House Systems l Experience and Judgment © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -36

Wages l Wage – -Money Paid for an Amount of Work -Usually for Direct Labor -Sometimes for Indirect Labor l Salary – -Money Paid for a Given Period of Time © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -37

Fringe Benefits l Additional Costs to Company l For Employees l Required by Law, Contract, Agreement l Can Be Included in Hourly Rates Or l Covered in Overhead © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -38

Determining Wages l Wage Only l Gross Hourly Cost -Wages and Fringe Benefits Costs l Wage Only Calculation -Based on Time in Attendance Cdl = Ha x Rh Eq 2. 11 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -39

Incentive Wages l Pure Incentive -(e. g. Working on Commission) Cdl = Np. Rp Eq 2. 12 Guaranteed Wage Plus Incentive Cdl = Ha. Rh + Rh(Hs. Np – Ha) Eq 2. 13 l Minimum Cdl = Ha. Rh l © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -40

Efficiency l Ratio of Standard Hours Produced to Actual Hours Worked l Measure of Labor Efficiency or Productivity Eq 2. 14 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -41

Gross Hourly Cost Wages Plus Fringe Benefits Costs l Detailed Calculations Required l -By Engineering -Or (Preferably) Accounting l Fringe Costs Include: -Legally Required Employee Costs -Contractual Costs -Voluntary Program Costs -Costs for Time Paid but Not Worked © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -42

Legally Required Costs l Social Security -Employer’s Contribution 7. 65% of First $87, 000 (as of 2003) l Medicare -Employer’s Contribution 1. 45% of All Wages Paid l Click for Current Rates © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -43

More Legal Requirements l Worker’s Compensation -Income for Worker Who Cannot Work Due to Injury on the Job l Unemployment Insurance -Pays Workers Laid Off Through No Fault of Their Own l Non-Exempt Time-and-a-Half Pay -Over 8 Hours/Day and/or 40 Hours/Week © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -44

Other Fringe Costs l Supplemental Medical Insurance -All or a Portion of the Premiums -Can Be Around $500/Month ($2. 89/Hr) l Life Insurance Premiums l Disability Insurance Premiums l Supplemental Pension © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -45

Pay for Time Not Worked l Vacation, Holidays, Sick Pay -Amount of Pay for this Time Is Apportioned Over Total Hours in the Work Year -Added to Wage Rate © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -46

Joint Labor Costs l More Than One Product Produced By Common Labor l Common Production Up to a Split Point l Common Labor Costs Need to Be Apportioned to the Different Products © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -47

(De)Jointing Labor Costs l Determine a Common Metric l Find a Proportional Relationship for the Products l Apply the Same Proportions to the Costs l Market Effects/Strategy Can Distort -Some Products Subsidize Others -Price Is Not Proportional to Cost © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -48

Learning l First Units Produced Take Longer l Familiarization with the Job Reduces Time l Predictable l Covered in Chapters 6 & 8 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -49

Learning © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -50

Summary l Definitions Relative to Labor Costs l How to Determine Time for the Job -Time Study -Work Sampling -Other l Finding the Labor Cost Rate -Wages, Fringe Benefits, Gross Hourly Cost © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 2 -51