Cracking the Code: Mastering Operating Cost Estimation for Your Industrial Feasibility Study

This process refers to planning all annual expenses of the project for, e.g., (5-10) years, and they are the day-to-day expenses that a business incurs to maintain its regular operations and generate revenue. Operating costs encompass all business activities to generate revenues, including production, marketing and sales, administration, and general expenses. The product costs show the cost of production activities like raw materials, labour, depreciation, utilities, maintenance, and more. The sales and marketing expenses include, for instance, workforces, promotions, and more, and the administration costs include staff costs, depreciation, utilities, rents, financial cost, and more. Costs are cash-outs to acquire services and materials, and they are a significant determent for financial reporting, product costing, pricing, and performance evaluation. 

Step-By-Step Process

• Clarify the project’s costing details, including sales and marketing, administration, production, organisation, and plans.
• Research the key costing indicators of the concerned industry. These indicators may include gross margin, operating margin, net profit margin, sales and marketing expenses as a percentage of revenues, administration and general expenses as a percentage of sales, etc.
• Set costing assumptions based on evidence.
• Clarify the staff costs.
• Clarify the depreciation, amortization, and provision costs.
• Identify all associated activities with revenues and estimate their realization costs.
• List, estimate, and group all costs ($/year) into production, sales and marketing, administration, and general.
• Reclassify costs as direct (e.g., relevant to the cost centre of production) and indirect costs, or variable and fixed costs.
• Add contingency margin as a percentage of the total estimated costs to meet any unseen costing condition. 
• Evaluate and analyse cost estimates, yearly and classified per the main section, by comparing them with industry benchmarks and similar businesses before finalization.
• Share these costing assumptions and findings with your team and experts.

Example

Here are the operating costs of the pharmaceutical manufacturing facility:

Operating Costs- Production

Accounts	Year 1 ($/Yr.)	Year 2 ($/Yr.)	Year 3 ($/Yr.)
Cost of raw materials, packaging and waste	18,100	180,998	2,562,556
Factory staff costs	751,797	1,552,254	1,603,347
Utility costs	359	3,586	50,775
Maintenance costs	552	5,517	78,116
Communication costs	138	1,379	19,529
Travelling costs	225	2,248	31,832
Machine and tool calibration costs	414	4,138	58,587
Insurance costs	138	1,379	19,529
Office supply costs	138	1,379	19,529
Cleaning costs	276	2,759	39,058
Safety and fire service costs	276	2,759	39,058
Staff development costs	138	1,379	19,529
Factory- Internet and IT support services costs	276	2,759	39,058
Hospitality costs	207	2,069	29,294
Factory depreciation cost	1,986,450	1,986,450	1,986,450
Royalty cost	–	–	–
Factory transportation	207	2,069	29,294
Other factory costs	55,194	75,063	132,511
Total	2,814,883	3,828,188	6,758,052

Operating Costs- Marketing and Sales

Sub-accounts	Year 1 ($/Yr.)	Year 2 ($/Yr.)	Year 3 ($/Yr.)
Sales & distribution staff costs	74,160	153,120	158,160
Communication costs	675	6,747	95,520
Travelling costs	1,667	16,672	236,047
Office supply costs	556	5,557	78,682
Staff development costs	278	2,779	39,341
Marketing- Internet and IT support services costs	1,111	11,115	157,365
Promotion costs	13,894	138,937	1,967,061
Event management costs	3,890	38,902	550,777
Distribution costs	9,448	94,477	1,337,601
Vehicle fuels and maintenance	706	7,058	99,927
Printing costs	1,667	16,672	236,047
Advertising costs	5,557	55,575	786,824
PR costs	2,779	27,787	393,412
Hospitality costs	556	5,557	78,682
Sales & marketing  transportation	1,111	11,115	157,365
Goods transportation	9,521	95,205	1,347,906
Other sales & market costs	3,827	20,618	231,622
Total	131,403	707,897	7,952,341

Operating Costs- Administration & General

Sub-accounts	Year 1 ($/Yr.)	Year 2 ($/Yr.)	Year 3 ($/Yr.)
Management, administration, and inventory staff costs	346698	658416	680088
Communication costs	442	4,421	62,596
Travelling costs	617	6,175	87,425
Office supply costs	370	3,705	52,455
Staff development costs	247	2,470	34,970
Adm.- Internet and IT support services costs	1,113	11,127	157,540
Rent costs	864	8,645	122,395
Insurance costs	642	6,422	90,922
legal costs	494	4,940	69,940
Utility costs	741	7,410	104,910
Auditing costs	220	2,198	31,123
Financial costs	746081	781081	702973
Hospitality costs	417	4,168	59,012
Inventory administrative costs	1,235	12,350	174,850
Administration transportation costs	547	5,471	77,458
Non-Factory depreciation cost	604633	604633	604633
Other administration costs	51161	63709	93399
Total	1,756,523	2,187,342	3,206,689

Useful Tips

• Estimate the costs of production, sales and marketing, administration, organization, and so forth, whilst you prepare the feasibility study’s sections.
• Collect industry indicators of costing, brainstorm with your team, and consult experts.

Things To Avoid

• Avoid guessing works and assumptions without evidence.

Final Note

This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study. 

For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/

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Or email us at: maldawood@growenterprise.co.uk

The author: Munther Al Dawood- Industrial Enterprise Expert

http://www.growenterprise.co.uk