Include minimums and inventory is material cost.
      
When calculating material cost it is important to consider the total annual cost of material for the assemblies.  If you build 1000 sub-assemblies per year, but have to buy a box of 4000 connectors to build them, that needs to be amortized in.  This inventory sits a long time and can be lost or damaged in storage, if it is ever used at all.  The complete calculation includes annual inventory purchases for the project and makes considerations for average inventory levels and their related inventory holding costs.

Labor is more than salaries.

As you probably are aware, the actual salaries paid are not the entire compensation for plant employees.  Accounting or H/R probably has a figure to help establish the extra burden for each associate.  Make sure this figure is used in conjunction with the actual and related hours the employees use on these projects.  One of the benefits of using a contract manufacturing company is that they often use a portion of temporary and part time labor so that employee hour usage is maximized.

Transaction costs are real and must be considered.

A lot has been made of transaction costs and estimates range from invisible to extraordinary.  So much so that many people discount these figures all together.  The fact is that if a buyer spends 60% of their time placing purchase orders, then 60% of their salary needs to be attributed to the order cost.  Buying parts for a sub assembly may require 12 transactions, when buying the assembly complete would only require 1 or 2.  This is a substantial savings and a major consideration when deciding to use a contract manufacturing company.

Freight charges can add up quickly.

Like transaction costs, freight charges are a major concern and should be taken into consideration.  It is cheaper to ship one pallet of parts than to ship 25 boxes from different suppliers with the same total weight.  Add the annual freight charges to the overall annual cost.

The formula for calculating your true cost is not simple.  To be properly figured it is necessary to add annual direct and indirect labor cost, total annual material cost, annual transaction and freight costs.  Divide that into the annual assemblies purchased and now you have a true cost.  And that true cost is what you should be comparing to a contract manufacturing company's quote.

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Articles are the opinion of the writers and are not necessarily an endorsement or criticism of any particular supplier or service.