COST MODEL DEFINITION BY MEANS OF COST STRUCTURES

E. ten Brinke, D. Lutters, A.H. Streppel, H.J.J. Kals

Laboratory of Design, Production and Management; University of Twente, P.O. Box 217,
7500 AE Enschede, The Netherlands

Abstract
In a cost estimation system, the definition of cost models is the most important aspect. The
way in which cost models are defined determines the possible extent of control of all aspects
of cost modelling. A generic template for the definition of cost models, i.e. the cost structure,
is proposed. This structure incorporates cost types, cost functions and cost parameters. Since
the cost structure is based on an information structure, it can be applied with the concept of
information management based on the Manufacturing Engineering Reference Model.
Therefore, it is possible to construct a cost model view. The consistency and completeness of
the cost structures and the cost models can be monitored through this cost model view.
Keywords: cost estimation, cost control, information structures.

Introduction

The possible extent of control of cost modelling and the control and comparison of cost
models is determined by the definition of cost models. In addition, the possibility to analyse
the results and the possibility to create reports is largely determined by the definition of the
cost model as well. It is preferable to have a generic tool for the definition of cost models,
which incorporates the aforementioned characteristics. This tool should be flexible enough to
allow any cost model to be defined.
Lately it has been recognised that information management is a very important aspect in
the control of the product development process. Since cost estimation requires information
about every aspect of the product life cycle, adequate information management is of great
importance. The Manufacturing Engineering Reference Model and the related information
structures offer the desired information management system.

Information Management

Control of the manufacturing cycle in a concurrent engineering environment depends on the

control of the interaction and communication between diverse disciplines. The availability
and accessibility of coherent information makes good communication possible. Access to
meaningful representations of existing and up to date information is more desirable than the
exchange of information [1]. These considerations stress the need for overall information
structures.

2.1

The Manufacturing Engineering Reference Model

Because different views on a manufacturing system

exist, the system is described by a reference model.
Such a reference model represents a system as an
organisation in terms of its structure of relatively
independent, interacting components, and in terms
of the globally defined tasks of these components
[2]. The Manufacturing Engineering Reference
Model (fig. 1) emphasises the equivalent
importance of products, resources and orders in the
manufacturing cycle [1].
The model includes the next functions.
Company Management determines the company
strategy; it determines the range of products and the Fig. 1: The Manufacturing
required processes and resources. The development Engineering Reference Model
of a product and its variants, starting from
functional requirements up to final recycling or
disposal is dealt with by Product Engineering.
Resource Engineering refers to all life cycle aspects
of the resources of a company (specification,
design, development, acquisition, preparation, use
and maintenance). The in-time execution of
production orders is settled by Order Engineering.
The actual execution of the generated production
plans is carried out by Production. The kernel of the
model is Information Management; it deals with the
access
of
meaningful
representations
of
information.
In conformance with the reference model, Fig. 2: The three information
three information structures are distinguished (fig. structures
2). The three structures reflect respectively productfamilies, resources and orders by means of the
elements and relationships they consists of. The
information structures can also, implicitly, be
related to each other. So any information structure
can principally be represented with the model
shown in fig. 3. An element can be part of any
aspect system, here referred to as domains. An Fig. 3: The fundamental structure
important aspect of the fundamental structure is that it has no predefined hierarchy. Besides
the information structures, an ontology can be distinguished. It represents the types of objects
and the relations of the objects in the information structures. The ontology can be described
with the fundamental structure as well.
The domains are sovereign, but different interpretations of one domain are possible. For
example, a process planner could interpret product geometry differently as a designer. The
designer uses design features whereas a process planner uses manufacturing features, they are
based on the same geometry but they are arranged differently. To be able to deal with such

different interpretations, a view is used. A view furnishes a focussed, partial representation

and specification of the information in a certain domain. With the help of a filter a partial
representation and specification of the information in a certain domain can be created. For
example, it can be practical only to look at a component instead of the complete assembly.
In order to support the interaction and communication of different engineering
processes through the information kernel, the kernel has to be kernel for those processes as
well [3]. In terms of architectures, the engineering processes are functional modules arranged
around the information kernel. A cost estimation architecture based on this principle was
proposed in [4]. In this architecture, the definition of costs is distinguished as a functional
module.
2.2

The cost view

The least requirements for cost control are

knowledge of the costs, based on cost
estimates and a generic method to store the
cost information. In addition, it is
advantageous to have a highly differentiated
view of the production costs [5]. Knowledge
of the costs can be obtained through the cost
drivers, i.e. the cost driving product
characteristics. In general, four cost drivers
can be identified: geometry, material,
production process and production planning.
These cost drivers can be related to the
fundamental structure (fig. 4). In this way, Fig. 4: The cost drivers in the fundamental
the costs can be stored in a generic way and structure
a differentiated view of the costs is possible
because the costs can be related to any product element and to any cost driver. Because costs
can be related to any element, it is also possible to calculate the costs of separate elements
with different cost estimation methods. The value of the costs can also be attached to the
product information structure.

Fig. 5: A global product information structure with cost drivers and cost values

Now, a cost view in the context of the Manufacturing Engineering Reference Model can
be constructed. In fig. 5, a fictive and rough cost view is visualised. The cost view can be used
to find irrational designs [6], i.e. relatively expensive (parts of) designs. Fig. 5 reveals that
one component constitutes more than 60 % of the overall costs. Zooming in on that
component makes clear that the production costs of one of the features is relatively high.
Based on this knowledge, the cause of the relatively high costs is known and a redesign of the
component or feature may be justified.

Cost model definition

The previous sections have described the information structures and how cost information can
be related to these information structures. Now, we need to define the cost models that
calculate the costs. In order to have full control over all aspects of cost modelling, a generic
template for the definition of cost models in a cost estimation system is preferable.
3.1

The cost structure

In a cost estimation system based on the Manufacturing Engineering Reference Model and the
related information structures, it is obvious to record a cost model template in an information
structure. The proposed cost structure and its relation to cost models, cost actuators and cost
drivers is depicted in fig. 6.

Fig. 6: The cost structure and its relation to cost models, cost actuators and cost drivers
The cost structure is a generic template for the definition of costs for any object. It
consists of cost types, cost functions, cost parameters and their relations. The attributes (not
shown in fig. 6) of a cost structure are:
- Name: a unique identifier, e.g. generative machine cost structure;
- Type: the type of cost calculation, e.g. generative cost estimation;
- Method: the method of cost calculation, e.g. Activity Based Cost estimation;
- Accuracy: the achievable accuracy of the result of the cost structure;
- Description: a short description of the cost structure;
- Value: the costs represented by the cost structure (if all cost parameters are known).
A cost type is a subdivision of the costs. A subdivision of the costs is usually made for the

purpose of cost analysis. The attributes of a cost type are:

- Name: a unique identifier, e.g. material costs;
- Type: the type of costs, e.g. direct costs;
- Description: a short description of the cost type;
- Value: the costs represented by the cost type (if all cost parameters are known).
The cost function is the actual function used to calculate the costs of a certain cost type. The
attributes of a cost function are:
- Name: a unique identifier, e.g. cmat;
- Description: a short description of the cost function, e.g. material costs;
- Value: the costs calculated by the cost function (if all cost parameters are known).
A cost parameter is a parameter of a cost function, which is usually a characteristic of an
object influencing the costs. The attributes of a cost parameter are:
- Name: a unique identifier, e.g. tsetup;
- Type: variable (dependent on the cost-carrier, e.g. a dimension), pseudo-constant (fixed
for a certain time period, e.g. overhead factor), constant (fixed, e.g. initial costs of a
machine)
- Description: a short description of the cost parameter, e.g. set-up time;
- Value: the value of the parameter (if determined).
The cost parameters are not directly assigned to the cost function because they can be used in
more than one cost function at the same time. In this way, they only have to be specified once.
In addition, the cost parameters can easily be used to govern the cost calculation of a cost
structure. When the value of a cost parameter is required for a cost calculation but it is not
known yet, a value can be obtained through the cost drivers. The cost parameter can be
classified by a cost driver and the cost drivers can be related to an engineering process. For
example, if the process time of an operation, belonging to the cost driver 'process(es)', is not
yet determined, process planning can be activated to generate the required process time.
The cost actuator can refer to any object that causes costs. The objects must be stored in
an information structure. In the case of the Manufacturing Engineering Reference Model, this
structure can be the Product Information Structure, Resource Information Structure, Order
Information Structure or the Ontology.
In terms of cost structures, a cost model is the collection of cost structures for one cost
estimation method. Multiple cost models can be created by defining multiple cost structures
for one cost actuator. Besides that, different levels of cost structures can be defined, i.e. less
accurate cost structures based on less detailed information and more accurate cost structures
based on more detailed information. In this way, cost models for various stages of the product
development cycle can be defined. The choice on which cost model to use, can be based on
the required accuracy of the required cost estimate or on the available information.
Because more cost functions can be defined for one cost type, one cost function has to
be indicated as the active cost function through the Option point.
3.2

Examples of cost structures

The concept of a cost structure will be clarified with some examples of possible cost
structures. Because any object in an information structure can be a cost actuator, it is
impossible to discuss all possible cost structures. The definition of cost structures will totally
depend on the cost estimation philosophy of a company, i.e. the used cost estimation methods.
First of all, fig. 6 shows that a cost actuator can consist of more than one cost actuator.

This is clarified in fig. 7 for the production method laser cutting. When only the production
method is determined, the cost structure for the method is used to generate a cost estimate.
Because production method information is less detailed, such a cost structure will probably
generate a less accurate cost estimate. When also the machine and operator are known, the
corresponding cost structures are used. Since these cost structures use more detailed
information, a more accurate cost estimate will be generated.

Fig. 7: Example of a cost actuator consisting of more cost actuators

It is possible to define a cost structure for any class of objects, identified as the type of
an object. In fig. 8 an example for a production machine is given. This cost structure is may
be part of a generative cost calculation and it contains general machine characteristics to
calculate the costs. Whenever a new production machine is bought, the same cost structure
can immediately be used to calculate the costs. If the machine has some specific features that
require specific cost functions, a cost structure for that particular machine, e.g. the laser
machine in fig. 9, can be defined. When both cost structures are defined, the more specific
cost structure will be used because it uses more detailed information in contrast to the general
cost structure.

Fig. 8: Example of a cost structure for a machine

Fig. 9: Example of a cost structure for a specific laser

In order to use variant based cost estimation, a cost structure related to the product
information structure has to be defined. Fig. 10 depicts an example of such a cost structure. A
dedicated variant cost estimation program calculates the actual costs. It calculates the total
costs of an assembly or component. In this case, the cost parameters are the parameters of the
function call to the program. In this way, other external programs, e.g. a neural network, can
be integrated in the cost estimation system.

Fig. 10: Example of a cost structure for assemblies and components

Another important cost structure related to the product information structure is a cost structure
for the material costs as depicted in fig. 11.

Fig. 11: Example of a cost structure for the material costs

In an Activity Based Costing method, overhead costs are related to cost drivers. For example,
the design costs can be related to the number of orders that the design department deals with
in a given year. This leads to a cost structure of an order as depicted in fig. 12.

Fig. 12: Example of a cost structure for an order

3.3

The cost structure view

The cost structures can be monitored through the cost structure view on all information
structures. The cost models can be monitored through filtering the cost structure view for a
specific cost model. By applying other filters, the cost types, cost functions and cost
parameters can be focussed on. In this way, the completeness and consistency of the cost
structures and cost models can be monitored.

Example of the use of cost structures

This fictive example demonstrates the use of cost structures in an integrated cost estimation
system. The design, process planning and production planning of the computer power unit
depicted in fig. 13 are considered. The example assumes that the cost model and the
accompanying cost structures are completely determined.
A small engineering-to-order sheet metal company had to develop the computer power
unit. The most important available production methods and resources are listed in table 1. The
company makes use of the Manufacturing Engineering Reference Model and for cost

estimation both variant based cost estimation and

generative cost estimation are used. For the cost
calculations cost structures for the production
methods, resources, components and assemblies
are defined in accordance with the cost structures
depicted in fig. 7 through 12.

production methods
laser cutting
punching
nibbling
bending
welding

resources
1 laser
1 punch machine
1 laser-punch machine
1 nibble machine
1 press brake

Table 1: The most important available

production methods and resources

Fig. 13: A computer power unit

As soon as a designer creates a component e.g. the cap, it automatically inherits the cost
structure(s) defined for the component in the ontology (e.g. fig. 10 and 11). Because only
geometrical information is available at this stage, a cost estimate can only be generated with
variant cost estimation. The variant cost program and its settings, the variant cost structure
(fig. 10) and the product information structure are used to generate a cost estimate. If a
designer wants to make a decision based on costs he can alter the design and refresh the cost
estimate or he can create two variants of his design and do a cost calculation of both variants.
Because the design department was involved, the overhead costs for design are related to the
order by means of the cost structure depicted in fig. 12. The used design overhead rate was
determined by the cost estimator based on historical information and predictions of company
management. Therefore, the value is pseudo-constant because it can change when the
predictions are adjusted.
During macro process planning technical suitable production methods are selected and
attached to the product structure, the accompanying cost structures are automatically attached
as well. Based on the required accuracy of a cost estimate either the variant cost structure or
the method cost structures will be used to generate a cost estimate. When macro process
planning is only carried out for the cap, the cost estimate for the cap can be calculated with
the method cost structures. The cost estimates for the base and strip still can be generated with
the variant cost structure. The suitable production methods selected from table 1 for the
connection holes (base component, fig. 13) are laser cutting and punching. By activating both
methods one by one, cost estimates for both variants can be generated and based on these
estimates a choice between both methods can be made.
During micro process planning more detailed information about the production is added
to the product structure. The resources are determined and with the cost structures defined for
the several resources (e.g. fig. 8 and 9), a cost estimate can be generated. When more
resources from table 1 are suitable for an operation, again a choice based on cost estimates

can be made here. When for instance the cap component requires both laser cutting and
punching, the choice for the laser-punch machine could be made because of less set-up costs.
Process planning determines the actual used resources and the time aspects of all orders.
At this point, it could be noticed that the laser-punch machine is already fully booked,
because the process-planner assigns all products requiring laser cutting and punching to this
machine. Through the product information structure, the process planner can track down the
reason why the process planner has selected the laser-punch machine. If this was done based
on costs and not based on technical feasibility he could reactivate the other technical suitable
resources. Next, he can make a selection between the resources based on process planning
aspects.
During the engineering cycle, cost reports can be made at any moment. When the
product is finished, it is stored in the order information structure, including the used cost
structures. This enables the recalculation of the costs at any time, even when the used cost
models have changed.

Conclusions

The proposed cost structure enables the control of all aspects of cost modelling. It is possible
to compare cost models or to use multiple cost models at the same time. The cost calculation
can be governed by means of the cost parameters. The integrated use of cost types enables the
analysis of the costs and the possibility to create differentiated cost reports. Because the cost
structure is based on an information structure, it is easy to use in an information management
system such as the Manufacturing Engineering Reference Model. However, for a proper use
of the cost structure and the required cost information an information management system is
necessary. Furthermore, the control of the cost structures is relatively easy by means of a cost
model view. In summary, the cost structure enables the definition and control of any cost
model.

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