# Estimating Procedure

Estimating procedure is explained step by step below:

1. Production planning department decides the requirements and specifications of the product.

2. Production planning department makes out the drawings. Lays down the method and sequence of operations, machines to be used, rates allowed to the labor in consultation with the time and motion study department and wages department.

3. To decide accuracy and finish required.

4. To prepare a list of the components of the product.

5. To decide which component can be manufactured in the concern itself and which should be procured from outside.

6. Determine the material cost by calculating the quantities of various types of material required.

7. Determine the time required on various operations by using calculation methods or by time and motion study and adding suitable allowances.

8. Determine labor cost considering the wage rate allowed for various categories of operators and other workers employed for manufacturing the product.

9. Determine the prime cost after adding direct expenses in the direct material and direct labor costs.

10. Determine the factory overheads including depreciation and expenditure on maintenance of the plant, insurance, power etc.

11. Determine administrative overheads considering the policy of the concern for calculating these expenses (i.e. by percentage or by hourly rate or by unit rate.)

12. Determine the packing and delivery charges etc.

13. Then to calculate the total cost.

14. To decide profit and add in the total cost, in order to fix up the sale price.

15. To decide the discount allowed to distributor.

16. To decide delivery time in consultation with the production department and sales department.

## Sources of Errors in Estimating

There may be some errors in estimating. These errors are of the following 2 types:

1. Unavoidable errors.

2. Avoidable errors.

1. Unavoidable Errors: These are those, which cannot be avoided. Some of the examples of such errors are given below:

a. Machinery breakdown

b. Power failure

c. Accidents

d. Drop in the efficiency of workers.

e. Drop in the efficiency of machines and tools.

f. Strikes.

2. Avoidable Errors: Some of the errors can be avoided by the estimator while preparing the estimates. These errors may occur due to less experience, carelessness and hurry in preparing the estimates.

a. Poor analysis.

b. Omission of some factors.

c. Not considering up to date data.

d. Repetition of some factors.

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