Cost Analysis Case Study

PROBLEM STATEMENT

Endicott iron foundry is a company involved in the casting of iron. The foundry has experience inaccurate labor cost for the casting part of the foundry work it undertakes. The company has been inaccurately quoting prices on per pound basis for all castings completed. However, the labor cost for difficult castings has been noted to be inaccurate and this has led to a loss in company revenue as well as profits. Throughout the history, the company estimates the cost for the delivered casting using the per pound basis. This cost estimation technique has posed difficulties in making a choice between simple and difficult castings. The reason for this observation is that the difference in prices seem to make negligible changes in labor costs. Therefore, cost estimates done per pound are not accurate and there is a need to determine costs based on time.

CONCEPT

In order to solve the problem posed above a number of solutions are available to the company. This includes modelling the entire production process in order to determine the cost for each stage based on time. Hence, the approach selected to solve the problem experienced by the company is applications of the scientific time study methodology. This methodology will be invaluable in determining the actual labor cost for both casting works and difficult casting works. This will help the company determine the time differences between simple and difficult casting works; therefore, the company can be able to cost difficult designs by the time taken to complete the task. This is a very effective method in calculation of costs as a factor of time as it gives systematic, defendable, and improved results. The methodology will also provide recommendations on what the organization can improve in order to cost its services better. This implies that it gives a means to change or improve the work in future at the foundry. Although it has some setbacks, as it requires trained staff for application, uses judgment to analyze some data and takes more time than other methods.
The procedure for this technique will include preparing for time study. Preparation mainly involves the methods analysis and improvement. It also involves separating all the operations into elements. These elements will be used in used in timing the entire operation as well as sketching the entire process. This will be done by examining the physical set up in order to ensure that it is efficient. Furthermore, the tools used will be examined in order to ensure workers use the right tools. The process will also be examined in order to ensure that it is optimized for maximum efficiency.
The second step for the study is to conduct time measurements and calculate standard time. Time measurements for each step will be done using a stopwatch and the time recorded. The standard time includes the following rate performance, calculate average time, calculate normal time determine allowances calculate standard time. Performance ratings will be used to convert average times to normal times. The allowance factor must also be obtained for all the elements. The allowance factor is used to determine standard time.

Therefore,

Normal time = average time x performance rating
Allowance factor Fa = ( 1 + PF&D)
Standard Time (Ts) = Normal time (Tn) x Allowance factor (Fa)
Current methods for determining labor costs are by using manufacturing overhead definition, manufacturing overhead and variable cost. Furthermore, the company examines how such costs affects the labor hours on the casting. Secondly, the company can approach the problem by use of true labor against manufacturing cost methodology where the company would value labor according to delivered work or employ the scientific time study methodology. The Endicott iron foundry oversight team: foundry superintended and the engineers have sighted a very big problem and they need answers. A proposal and analysis of an accurate method for determining labor cost for new quotes are required.

MODELING AND CALCULATIONS OF CONCEPTS

The entire foundry process can be divided into eight different process. These are arrival of raw materials, molding, heat treatment, melting, machining, quality checking and delivery of the product. The process map for the company can be modelled as follows:
For the purpose of this model, it is assumed that the tools used by the employees are appropriate for each stage in the production line. Using the time study it is possible to determine the amount of time needed for the production of simple designs as well as complex designs. The table below presents a model of the time study. The times included in the table have been assume for each of the identified
Average cycle time = 300 / 2
= 150 minutes
Cycle rating factor (performance rating) = 1 (for maximum efficiency)
Normal time = average time x performance rating
Normal time = 150 minutes x 1
= 150 minutes
Allowance factor Fa = ( 1 + PF&D)
Personal = 8%
Fatigue = 5%
Delay = 2%
PF&D = 8% + 5% + 2% = 15%
Standard Time (Ts) = Normal time (Tn) x Allowance factor (Fa)
Standard time per unit = 150 minutes * 15%
= 172.5 minutes
Using the standard time calculated above the labor costs can be calculated since labor cost = time x wage. For example if the company pays employees $3 per minute then the total labor cost for the entire process is 172.5 * 3 = $ 517.5.

EVALUATION OF CONCEPTS

The solution satisfied the requirement since by using a scientific time study it was possible to determine the labor cost of the organization. From the method, the labor cost has been estimated as $ 517.5 based on the assumptions made. The period of implementing the solution is one week. This is mainly because a number of time measurements need to be taken for each element in the process in order to determine the standard time for the entire cycle. The solution is an excellent match for the core competencies of the company. It will help the company in coming up with the best labor cost for difficult castings. Therefore, it will be able to bill customers appropriately and stay profitable. Other issues that need to be considered include the efficiency of the employees as well as the efficiency of the entire manufacturing process.

Works Cited

Hill, Arthur V. The Encyclopedia of Operations Management: A Field Manual and Glossary of Operations Management Terms and Concepts. Upper Saddle River, N.J: FT Press, 2012. Print.
Lewis, Ronald J. Activity-based Models for Cost Management Systems. Westport, Conn: Quorum Books, 2005. Print.
Salvendy, Gavriel. Handbook of Industrial Engineering: Technology and Operations Management. New York, NY: Wiley, 2001. Print.