Relative Cost analysis Steps; 1.Focus on particular product line or services.

Typically focusses on line that overlap most with competitor Largest line Line for which cot difference matter. 2. Construction of own cost structure 3. Building up estimate of competitor current cost structure. Finding drivers of cost of each item and how rival differs in each driver. Driver of factor cost. Bargaining power over supplier Location Policy Choices Driver of Productivity Scale Capacity Utilization Experience Policy Choices 4.Use of cost analysis to conduct what if analysis.

Good habits in relative cost analyses. 1.Keep Ethics in mind. Avoid bribing, misrepresenting, 2.Triangulate Try to confirm cost estimate by multiple angles. 3.Use publicly available data with caution. Try to build up cost estimate with bottom up approach. 4. Consider marginal cost as well as total cost For some analysis marginal cost is important whereas for other total cost is important. 5.Fill the gap Make best assumption ,double check the assumption .

Do sensitivity analysis for uncertain cost item . 6.Practice Requires trial and error,iteration, guidance from experienced individuals patience and lot of practice. Competitive cost analysis Strategic application of cost modelling. It allows for a direct comparison for a company and one of its prodects or services with a direct competitor or competitive offerings. Can be used to compare supplies with one another or with an in house option. It starts with basic understanding of cost accounting elemets- raw matrial ,overhead. Cost elements vs cost driver Cost element :Material cost ,Labour cost,Overhead and profit,Transportation cost Cost Driver : Purchasing scale.Plant Location ,Process technology ,product technology,Quality yield,Plant Layout, capacity utilization,demand variability, past standardization shipping mode,delivry lead time etc. Rigorous cost driver analysis to obtain optimal footprint strategy. Booz Allen Hamiltion Cost Driver Framework.

Principle of Cost Modelling 1. Capture Cost Driver not Cost element Cost Driver generate tru insight it answers what if whereas cost elements answers what is.What drives the cost .is it controllable or relevant in the context of competitive cost analysis.

2. Avoid Generic Templates Models A standard Tempates fails to recognize the range of possible cost modelling goals.It can capture standard cost elements only thoughtful modelling can discern and differentiate the cost drivers. 3. Consider total Cost of Ownership It should consider total ownership cost including non price components like inventory carrying cost ,Customer Scrap rate etc. 4. Start simple and Add complexity as needed Build a basic cost modeller with focus on critical cost driver and then try to increase the complexity to develop different cost driver relationships, dependency and impacts. Developing an initial complex model will produce noise that would obscure the most critical cost driver relationships. 5. Traingulate the data Obtaining reliable is the key chllanges in cost driver analysis.Triangulating dat from multiple source or from same soucrce over a period of time ensures the validity of input data yielding the best insight with more accuracy. TOOLS TO ANALYZE THE Cost drivers TEAR DOWN ANALYSIS It consists of physical disassembaly and piecemeal analysis of complete product.It catalogs each part,including the type of material,the probable process employed and the weight of the component. Usefule in design driven costs. Public Data Source Source of information are : Annual Report ,10 K SEC Filing,Companies web site.Information of industry by investment banks /consultant.Trade association, Govt and other NNon profit Orgabizatin reports.

Scale Curves and Utilization Impact. Scale Curves measure production costs as a function of facility capacity. Utilization crves measures the impact within a single facility of operating at some level other than full capacity. Average unit cost = Variabel unit cost +fixed cost/quantity

Thus Utilization curve quantifies the effect of volume changes in on a facility of a given size and the Scale curve compares facilities of different sizes.

These two types of curve can be combined to provide insight on the relative importance of scale and utilization and the sensitivity to volume changes for a given facility.