Page 236 - Plant design and economics for chemical engineers

COST ESTIMATION 207

absence of more-accurate cost figures from company records, or for a quick
estimate, the administrative costs may be approximated as 20 to 30 percent of
the operating labor.

DISTRIBUTION AND MARKETING COSTS
From a practical viewpoint, no manufacturing operation can be considered a
success until the products have been sold or put to some profitable use. It is
necessary, therefore, to consider the expenses involved in selling the products.
Included in this category are salaries, wages, supplies, and other expenses for
sales offices; salaries, commissions, and traveling expenses for salesmen; ship-
ping expenses; cost of containers; advertising expenses; and technical sales
service.
Distribution and marketing costs vary widely for different types of plants
depending on the particular material being produced, other products sold by the
company, plant location, and company policies. These costs for most chemical
plants are in the range of 2 to 20 percent of the total product cost. The higher
figure usually applies to a new product or to one sold in small quantities to a
large number of customers. The lower figure applies to large-volume products,
such as bulk chemicals.

BESEARCH AND DEVELOPMENT COSTS
New methods and products are constantly being developed in the chemical
industries. These accomplishments are brought about by emphasis on research
and development. Research and development costs include salaries and wages for
all personnel directly connected with this type of work, fixed and operating
expenses for all machinery and equipment involved, costs for materials and
supplies, direct overhead expenses, and miscellaneous costs. In the chemical
industry, these costs amount to about 2 to 5 percent of every sales dollar.

FINANCING
Interest

Interest is considered to be the compensation paid for the use of borrowed
capital. A fixed rate of interest is established at the time the capital is borrowed;
therefore, interest is a definite cost if it is necessary to borrow the capital used
to make the investment for a plant. Although the interest on borrowed capital is
a ftxed charge, there are many persons who claim that interest should not be
considered as a manufacturing cost. It is preferable to separate interest from
the other fixed charges and list it as a separate expense under the general
heading of management or financing cost. Annual interest rates amount to 5 to
10 percent of the total value of the borrowed capital.
When the capital investment is supplied directly from the existing funds of
a company, it is a debatable point whether interest should be charged as a cost.