Question

How do you calculate equipment setup cost

Answer 1

Equipment setup cost is the cost incurred to get equipment ready to process a different batch of goods. Hence, setup cost is regarded as a batch-level cost in activity based costing. Setup costs includes the labor and material to ready an equipment for production. It may include processing of work orders or a first-article inspection, gathering of all required equipment hand and automated, tools, work orders, materials etc. which are needed to perform the manufacturing process.

Setup costs include the costs of changing the tools or dies on the equipment, moving materials or components, and testing the initial output to be certain it meets the specifications.

Setup cost is viewed as a non-value-added cost that should be minimized. Setup costs are treated as a one time occurrence and that cost is divided or amortized over the batch size to be produced during the batch cycle. Each unit of the batch carries an equal share of the set up time and materials cost which are added to each unit run time and materials to calculate a total per unit cost. This cost curve on the part cost figure is high when batches are small and rapidly decreases with increasing batch quantity.