Cost Model

Cost Model

A cost model aids the business owners and the managers to identify the cost for certain activities and processes. With the use of financial computations or cost accounting allocation, companies can take basic information related to resources, such as raw materials, machineries, utilities and manpower etc. for converting the data into useful costs in order to set the price of goods and services, and estimate the development costs.

Importance of A Cost Model:

1. To assess the consumption of resources

  • How much or in what amount the raw material or other resources are required to produce a product/service?

2. Assists in decision making

  • Reduced resource issue to a common metric
  • Monetary valuation of resources
  • Comparison of expenses at two different locations in the same region
  • Comparison between current manufacturing operations and alternative facilities in a new location

Uses:

1. To evaluate cash requirements for an operation/project.

2. To estimate revenue requirements for the success of project.

3. To identify the strategies:

  • Make-buy decisions
  • Choice of process, design and technology
  • Acquisition/Selling strategies
  • Negotiation support

A cost model consolidates all calculations for a holistic consideration:

  • Determine cost drivers to lead the research
  • Communicate results with stakeholders – Internal: R&D, Management, Marketing – External: Industry Advisors, Investors, Customers, Licensing Partners

Our cost models focus on five key principles so as to create accurate and robust cost models for purchased/manufactured goods.

  • Cover cost elements as well as cost drivers
  • Commodity-specific models to emphasise on major drivers
  • Consider the effect of total ownership cost
  • Incorporate simple and qualitative information
  • Triangulate around data to enhance accuracy and confidence

The cost models include all major cost factors for manufacturing the product:

  • Top-down calculation of labour, material and capital to meet production volume
  • Cost sensitivity and scaling analyses
  • Process flow and value chain
  • By-products and their valuation
  • Estimated value of production project using sale price
  • Operational details (e.g. schedule of work shifts), capacity and throughput
  • Minute product details growth dynamics of business, production, or sales
  • Company financial model (debt, equity, taxes, etc.)
  • Interest on working capital, fixed investments or on loans
  • Depreciation on buildings, plant and machinery
  • GSA costs
  • Maintenance costs and overheads

Learn more about our Cost Modelling services.

Cost Model Procurement Resource