September 2023


www.us-tech.com Continued from previous page


nents are acquired beyond the customer’s requirements, they should either be billed to the customer or seen as a potential risk to the business due to excess inventory. Figure one shows an example. If one is


buying 100 capacitors, the unit cost may be $2 per capacitor. However, at a quantity of 500, the cost decreases to $1 per capacitor. While the unit price of the capacitor decreas- es, the total cost of materials increases. This cost advantage is established in the fact that as output increases, fixed costs are spread over a larger number of output items.


Labor When capturing labor costs for EMS, dif-


ferent types should be considered. Assembly cost: an activity that is performed for each assembly (pick-and-place, inspection, clean- ing). Batch setup cost: an activity performed for each batch or run of the job (kitting, machine setup). Job setup cost: an activity per- formed only once for each order job unrelated to the number of assem- blies or batches (purchasing, con- tract review, order entry). Non- recurring expense (NRE): an activ- ity performed only once for each product unrelated to the number of jobs (purchasing stencils). The batch, job and NRE


costs are all categorized as setup costs while an assembly cost is a variable cost. The job setup cost stays steady when assembly quantities increase. However, setup cost per unit would decrease as the quantities increase. Variable costs would stay the same per unit; however, the total variable cost would increase as quantities increase. Figure 2 shows an example.


A $100 setup cost stays constant when building a single board or 100 boards. The unit setup cost would be $100 for one board and $1 for 100 boards.


Overhead Overhead typically includes


other expenses that are not included in labor and materials costs attributed to the end cus- tomer. These are pulled from the profit and loss (P&L) statement below the gross margin line. These include rent, utilities, health insurance, depreciation, and office supplies. Unlike labor and materials,


overhead costs generally follow a stepping pattern. Higher quanti- ties of production will create a large increase in total overhead costs. An example of this is rent. Entering into a more high-volume business can cause rent to increase from $10,000 to $20,000 when expanding the square footage of a facility. This is a sin- gle increase in cost and cannot be increased gradually or fractional- ly for each square foot as the com- pany grows. It will create a step up as opposed to a linear trend. Unit overhead costs slowly start to decrease until there is an


Figure 2: total setup vs. unit setup.


increase in total overhead costs. It is important to consider overhead in


Page 67 Cost Modeling, Expenses, Markups and Margins


cost modeling in order to charge the correct proportion of expenses to a job. There are four common methods of overhead allocation that can be applied to the EMS industry:


l Include in markup. Including costs in markup calculations is typically used by com- panies in a basic phase of maturity. The sum of the total value of materials and total value of labor is marked up based on the known and unknown factors, such as risk, profit, etc. This is simplistic and fast, but highly variable.


l Include in “shop rate.” If using this model, companies should update shop rates when something with overhead changes. The sim- plistic approach allows for ease of use.


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