Page 164 - Design for Six Sigma for Service (Six SIGMA Operational Methods)

Value Engineering 137

Variable Burden Includes costs that increase or decrease as the
volume rises or falls. Indirect materials, indirect labor, electricity used
to operate equipment, water, and certain perishable tooling are also
included in this classification.

Allowance All costs other than material, labor, and burden that must
be included in the total cost of a product, such as packaging materials,
scrap, inventory losses, and inventory costs.
Total Cost Includes production cost plus profit and other expenses.
The following expenses are usually added to production cost by the sales
and/or accounting departments to make up the total cost.
Administrative and Commercial Costs Costs incurred in the adminis-
tration of the company, research, and selling of the product. They are
usually a factor represented as a percentage of production cost.
Freight Cost Shipping and handling costs.

Profit Amount earned in producing a product or a service. It is usually
applied as a percentage of production cost.

Sources of Cost Information
The application of cost-visibility techniques begins with an analysis of total
cost, progresses through an analysis of cost elements, and finally ends with
an analysis of component or process costs. To perform these steps the best
cost information available is required. This information will be available
from sources such as
Accounting: Current and historical costs (actual costs)
Purchasing: Cost of purchased items
Suppliers: Estimates and/or quotations, costs, process information, and
material prices

In the service industry, labor usually accounts for a big portion of cost. In order
to figure out the exact labor cost component in each item, some traditional
motion-time study has to be performed. For example, in the health-care industry,
the doctor’s time is an important source of cost because it is very expensive. If
we conduct a value-engineering study on emergency care, we may have to use
a stopwatch to track the doctor’s time usage for patient visits. After recording
the time for a sufficient number of patient visits, we can calculate the average
doctor time and use that as a basis in computing the doctor’s cost.

Review this cost data in accordance with the process outlined in the text
on cost visibility, and make a preliminary judgement of the potential profit