AACE INTERNATIONAL
Chapter 10
Process Product Manufacturing1
Dr. Kenneth K. Humphreys, PE CCE
INTRODUCTION
To perform an operating or manufacturing cost estimate
properly, and to determine the potential profitability of a
process, all costs must be considered in certain specific cate-
gories. The distinction between the various categories is quite
important, as they are treated differently for purposes of cal-
culating taxes and profitability.
LEARNING OBJECTIVES
After completing this chapter, the reader should be able to
• understand how to determine the operating and manu-
facturing costs of a continuous process on a conceptual
basis,
• distinguish between direct and indirect costs in manu-
facturing as compared to construction,
• relate operating costs at full production to reduced costs
at less than full plant capacity, and
• understand depreciation rules and their relationship to
operating and manufacturing costs.
TYPES OF OPERATING COST ESTIMATES
AND ESTIMATING FORMS
As is true for a capital cost estimate, the purpose of an oper-
ating cost estimate is the controlling factor in determining the
type of estimate to be performed. Preliminary or order-of-
magnitude estimates are often used to screen projects and to
eliminate uneconomical alternatives. More detailed estimates
are then applied when the screening process has reduced the
choice to a relatively few alternatives.
In performing the operating cost estimate, particularly on a
1 Excerpted by permission from Humphreys, K. K., and P. Wellman. 1996.
Basic Cost Engineering. 3rd ed.New York: Marcel Dekker, Inc.
10.1
PROCESS PRODUCT MANUFACTURING
preliminary basis, good judgment is necessary to avoid
excessive attention to minor items, which, even if severely
over- or underestimated, will not have a significant effect on
the overall estimate.
In performing the operating cost estimate, it is also necessary
to calculate costs at reduced production rates as well as at
design capacity. Operating costs are decidedly nonlinear
with respect to production rate.
This fact and the fact that virtually no plant or process oper-
ates all of the time at full design production rate make it
imperative that reduced production rates be considered. This
subject is discussed in considerable detail later in this chapter.
Finally, when estimating the effect of changes or additions to
an existing process, the cost analysis should be performed on
an incremental basis to evaluate the effect of the change as well
as on an overall basis to determine if the entire project is wor-
thy of being continued even without the change. Frequently a
process change will not be economical, but the total project
will be attractive. In other cases, the incremental costs of a
change will appear to be quite profitable, but this profit will
not be enough to offset losses entailed in the existing portion
of the plant. Thus both types of analyses must be made.
Operating cost estimates can be performed on a daily, unit-
of-production, or annual basis. Of these, the annual basis is
preferred for the following reasons:
• It “damps out” seasonal variations.
• It considers equipment operating time.
• It is readily adapted to less-than-full capacity operation.
• It readily includes the effect of periodic large costs
(scheduled maintenance, vacation shutdowns, catalyst
changes, etc).
• It is directly usable in profitability analysis.
• It is readily convertible to the other bases, daily cost and
unit-of-production, yielding mean annual figures rather
than a potentially high or low figure for an arbitrarily