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Cost Modeling, Allocating Overhead Expenses and Determining the Right Markups and Margins
By Kaitlyn Dotson, COO, CalcuQuote
ices (EMS) industry, there are common situ- ations where a business owner, chief finan- cial officer (CFO) and general manager have different approaches to a cost model. As a result, these different approaches create dif- ferent outcomes for the estimated cost of a job.
E Usually, this is because there is no con-
sistent model to estimate the cost and the markups that should be applied based on the specifications of the job and customer requirements. It is important to implement an accurate cost model to both provide com- petitive quotes and to ensure accuracy and consistency of quotes delivered to customers.
Cost Modeling A cost estimation model is a mathemati-
cal algorithm or parametric equation used to estimate the costs of a product. The result of a cost model is provided to a customer to understand a projected price for a job, as well as financial planning for the business. In the EMS industry, a customer sends a
request for quote (RFQ) for a printed circuit board assembly (PCBA) to one or more con-
Figure 1: total costs vs. unit costs.
from each of those areas into estimated costs to create a quote for the customer. The inputs to a cost model are important
to consider. A cost is an amount that is given up or paid. This can include giving up cost in the form of money or time. There are four
stimating the cost of a potential project can be the reason you win or lose a job. In the electronics manufacturing serv-
tract manufacturers (EMS companies) who use resources from each department to esti- mate materials, PCB, job floor labor, and overhead expenses. This RFQ would be put into a cost model to convert the resources
main categories of cost modeling that CalcuQuote would recommend as a best practice for the EMS industry: materials, labor, overhead, and risk.
Materials Calculating material costs typically fol-
lows a specific path. An OEM or ODM pro- vides the BOM to the contract manufacturer. The CM will use software, such as CalcuQuote’s QuoteCQ application, and send it to their suppliers’ partners through API or another approach to identify cost and avail- ability.
Material costs typically include cost of
components, leader and attrition, consum- ables related to the job, additional markup on the materials, and consideration of suppli- er terms and delivery options. In the process of determining material
costs based on the given inputs, it is impor- tant to consider the quantity of boards that a customer intends to purchase. As the quanti- ty increases, the per unit cost typically decreases due to economies of scale. For a CM, it is crucial to factor in this quantity when calculating component costs. However, it is important to note that if excess compo-
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