Calculation of Heat-Treating Costs
Heat-treat costs are difficult to get a handle on. In this article, an accurate cost process is established.
The first half of my career as a metallurgist and heat-treat manager was spent in captive heat treating. There, the heat-treating costs were determined by corporate accountants who generally got the costs totally wrong. They used many averages and allocated most of the cost components without using costs associated directly with the specific operation or process.
As an example, energy costs were allocated by the square feet the heat treat occupied rather than using the fact that about 90% of the plant energy costs was used in the heat treat, even though it occupied only 5% of the area of the plant. This resulted in an average cost for carburizing of $0.04/pound in the early 1970s. Local commercial heat-treating shops (that probably were closer to the actual cost) were typically charging $0.15-0.30/pound for carburizing of the same materials and case depths.
Later, as manager of a commercial heat-treating operation where errors in heat-treat pricing could affect the very success and profitability of the company, accurate pricing was an important issue. In this experience, the company had pages and pages of prices by the pound for each of the many treatments that were offered. Every year, the individual price sheets were multiplied by an inflation factor and re-issued. When questioned, those responsible for quotations and pricing were not sure how most of the prices were originally derived, but “the prices had been determined several years ago and then annually updated.”
Desired Cost-System Features
The objective was the development of a simple, cost/pricing system that would be reasonably accurate and could easily be recalculated if the yearly costs of any of the basic cost components change. The costs could then be accurately assigned to the hourly cost of operation for each piece of equipment or similar groups of equipment. An advantage of the system would be that if the loading characteristics of individual parts and the process cycle are known, one could accurately determine the required price per piece or price per pound for that equipment and process.
Another advantage of the system would be that if there is a record made of the actual total hours of operation per year for each piece of equipment, simple calculations could then be made to cross-check the calculated sales (using the equipment-hour rates) to actual total sales. Shortfalls in pricing for specific equipment or processes could then be identified for possible corrective action.
Earlier published work grouped the heat-treating costs into the same general category by process and, thus, were not assigned to specific equipment. By using this method, the costs are assigned to the specific category of equipment being used.
Plant Operational Details
The commercial heat-treating company from which this cost data was taken operated on a 24-7 basis. Using this schedule, allowing for holidays, the available hours of operation were 350 x 24, or 10,704 hours per year for each piece of primary equipment.
A wide range of parts were heat treated in the facility including various shafts, gears, sprockets, bushings, aircraft connecting rods and related engine parts, etc. Materials heat treated were steel, steel investment castings, aluminum castings, various cast irons, and wear- and corrosion-resistant cast iron.
There were six batch integral-quench atmosphere furnaces (two 2-zone and four single-zone), one pusher atmosphere carburizer line with related washers and tempering furnaces. The processes used were carburizing, carbonitriding, harden and temper, atmosphere annealing and carbon restoration.
All furnaces were gas fired except for the pusher, which was electrically heated. There was a liquid-ammonia tank and liquid-nitrogen tank on site, and all furnaces had both manual and automatic nitrogen purge systems. The two-zone batch atmosphere furnaces were kept in certification to AMS 2750 as well as two companion tempering furnaces. All furnaces had automatic programmed cycle and carbon control, and all used the same “fast” oil for quenching. Three of the batch tempering furnaces were also equipped for nitrogen tempering. The endothermic gas was supplied by two 3,600-CFH, automatic dew-point controlled and air-cooled generators. The output was fed to a looped common header.
Sales and utilization data were recorded for similar classes of these furnaces. Overall atmosphere work accounted for about 52% of overall sales.
There were a total of five induction units. There were three RF (50, 60 and 150 kW) units and two 3/10 kHz (100 and 150 kW) units. Each unit had program-controlled dual scanners, which were also bussed for continuous-use applications. Two concentrations of temperature-controlled polymer quench (5% and 20%) were available for use in holding tanks at each unit. The electrical component cooling used distilled water, which was cooled using shell and tube heat exchangers (as was the polymer quenchant) with water from a large 5,000-gallon treated-water system. This system was in turn kept cool by two evaporative cooling towers.
There were two continuous tempering furnaces in the induction area geared for a two-hour total throughput time cycle, two batch tempering furnaces and a parts washer.
Sales and utilization data were recorded for each piece of equipment. Induction work accounted for about 28% of total sales.
There was one large gas-fired, recirculating air furnace (certified) served by a manipulator for handling up to 3,000-pound loads of aluminum. After solution treating by quenching in a 5,000-gallon water tank, the parts were aged in the same furnace.
Sales and utilization data were recorded for this equipment. Aluminum accounted for about 3% of total sales.
There were two direct-fired, high-heat (up to 2000?F) furnaces with manipulators, cool-down fan station and 2,000- to 5,000-gallon water-quench tanks. These furnaces were used for hardening 17Cr and 27Cr white irons, solution treating manganese steel, and normalizing and annealing other steels.
Sales and utilization data were recorded for this equipment. These treatments accounted for about 13% of total sales.
Additionally, there were two straightening presses, stop-off painting, a subzero-treatment cabinet, glass beading, table blast and tumble shot cleaners.
Sales and utilization data was recorded for this equipment. These operations accounted for about 4% of total sales.
For the purpose of calculating heat-treat processing cost per hour for a piece of equipment and ultimately the selling price, costs are separated into the following categories: direct costs, allocated costs, capitalized cost, and general and administrative (G&A) costs. Cost-accounting systems used by companies doing heat treating accumulate many different cost categories. Using those provisions or reasonably adjusting and allocating larger cost-collecting categories of use may be necessary.
Direct costs are those directly associated with the equipment or equipment grouping for which the costs per hour of operation are being determined.
- Direct labor is the hourly cost of labor for those directly involved in doing the process. If one person is assigned to operating two pieces of equipment, then one-half of the hourly rate would be charged to each piece of equipment. Most companies keep the cost of direct labor as a separate line item, and the average number of direct-labor employees (i.e. the average hourly cost for direct labor) can easily be determined.
- Benefits are the sum total of all direct-employee fringe benefits divided by the number of employees in the category. The benefits would include, but are not limited to: company-paid portions of health and life insurance, workman’s-compensation premiums, federal and state unemployment tax, holiday and vacation pay, employer social security contributions, company IRA contributions, etc.
- Energy costs include both electrical usage for heating and related motors; heaters and drives; and natural gas usage for burners, pilots, flame screens, atmosphere enrichment, atmosphere generator gas and for related parts washers and tempering furnaces, if applicable.
- Water costs include water cost and usage by any of the equipment used in the process. Included would be fan bearing cooling, make-up water for wash, water-treatment costs, de-ionized or distilled water usage, etc.
- Process-gas costs include other gases used in the process or for process safety such as ammonia (gas or anhydrous liquid), propylene, hydrogen, argon, or as hydrocarbon additives. Nitrogen, depending on its use for the process or as a safety purge, may need to be an allocated cost.
Allocated costs often are a series of smaller costs, more difficult to directly assign, for which average and cumulative costs can be more accurately assigned by specific equipment or similar equipment.
- Nitrogen purge costs include everything associated with the purchase and use of the gas.
- Process-control costs include the outside purchases of replacement thermocouples, protection tubes, instrumentation checks, instrument replacements, periodic furnace surveys, and thermocouple and temperature calibration checks. It also includes the cost of maintaining valves, solenoids, valve motors, oxygen-probe replacements, outside analyzer maintenance, calibrations, etc.
- Quenchant costs include the cost of additive quench materials such as water, polymers, oils, gases used for quenching, etc.
- Repairs/maintenance includes the cost of outside purchases of replacement materials and services used to maintain the equipment such as fans, motors, bearings, radiant tubes, refractory, hearths or skid rails, etc.
- Fixture/tooling costs include trays, baskets, part fixtures, inductors or locators, and/or the repair of these items.
Capitalized costs are the annualized costs based on the purchase price of the equipment and all related expenses that are capitalized and directly related to the equipment.
General and administrative (G&A) costs would include everything else not directly assigned, including the cost of administrative, supervisory function, all indirect personnel with related benefit costs, building cost, building maintenance and general utilities. These costs are included based on the ratio of G&A cost to total costs.
Efficiency factor (profit) is the overall desired return on investment or return on capital for the heat-treating operation or heat-treating plant.
Collecting Use/Cost Data
Today, computerized systems are available to build more accurate cost monitoring using a combination of process sensors and computer database collection. If a company has a main platform for process control, it most likely has the ability to record data from sensors on equipment usage, gas usage, kilowatt consumption, water, etc. The possibility also exists to record actual running time for fans, pumps, agitation motors and so much more. If this is the case, those numbers should be used instead of some of the “educated” estimates as presented herein.
It is necessary to keep accurate records regarding the actual amount of time that each piece of equipment is in production over an extended period of time (preferably a year). This data can then be used to determine the number of hours over which the costs will be distributed. A log regarding usage of equipment was maintained as well as other important costing information using Excel® spreadsheets.
Some useful conversion factors for the necessary calculations are shown in Table 1. These factors include energy unit conversions and liquid-to-gas conversions for various commodities used in the heat-treating processes.
Shown in Table 2 are the typical average yearly costs (2002) for various commodities – natural gas, electricity, water, etc. The average cost per therm, KWH or gallon is determined by dividing the total yearly cost (including all components of cost) for the service by the total usage.
The other useful commodity cost needed in Table 2 is the average cost of endothermic gas, which is based on the then-current labor and utility costs. First, however, the allocated costs of process control and repairs/maintenance need to be determined (as follows) for the generator operation.
Cost Component Allocations
All assignable costs for a piece of equipment usually cannot be specifically assigned and tracked in an accounting system. Generally, costs are grouped with some other equipment. Therefore, some allocation of costs is always necessary. The basis for each allocation needs to be well thought out and make sense for the operation.
If the cost for the commodity (electric, gas, gases, water, manpower, depreciation, etc.) used by an individual piece of equipment is available, that number is assigned and used. Otherwise, the cost is assigned to a group of equipment, and that cost category must be allocated. This allocation can easily be done using the techniques demonstrated.
All cost components that are allocated will need to have a use-balance spreadsheet made so that all the areas and total commodity use are covered and balanced. Here, the total cost of nitrogen is known, but the hourly use cost must be assigned to each piece of atmosphere equipment that used nitrogen for purging.
Allocation of Nitrogen Purge Usage
The overall cost of nitrogen for the year is known to be $29,853. These charges involve equipment charges for the 6000 nitrogen storage tank and related equipment, possible nitrogen losses to venting and actual nitrogen use. The nitrogen flows for nitrogen purging were set at each furnace to be the same as the endothermic gas flows. The challenge is to then allocate the overall cost among the seven atmosphere furnaces.
In Figure 1, the average hourly cost of nitrogen for all atmosphere furnaces is determined by dividing the overall cost ($29,853) by the total utilized hours (30,071), which is $0.993. The total average nitrogen cost is then converted to a nitrogen volume that balances to the overall use in proportion to the relative endothermic gas flows. The average hourly cost per furnace is shown in the last column. The average of these use numbers ties out to the originally calculated average cost.
The technique used here of balancing the total costs or use of a cost component needs to be appled for all of the basic components of cost to ensure that the included uses balance to the overall use.
Allocation of Process Control and Quenchant Costs
In Figure 2, the primary equipment is shown in the first column, and the types of process-control systems are broken into three groups: A is temperature-control systems, B is oxygen-probe carbon-control systems and C is certification to AMS 2750 systems.
Listed in the second column is the number of temperature-control systems for each piece of equipment. This would include controllers, over-temps, recorders and all related equipment. The third column lists the number of carbon-control systems for each piece of atmosphere equipment. The fourth column lists the certified equipment. The number of each category of components is assigned to each piece of primary equipment. The known costs are then allocated by the attributed percentage of components in each category.
The oil-quenching cost is allocated by equipment roughly the same way (by utilization) except that the single-zone furnace percentage usage was decreased by about 10% each. That usage was added to the pusher furnace because of the push frequency, resulting in greater oil carry out.
The polymer quenchant cost for induction is also allocated by the relative utilization of a particular piece of equipment.
Allocation of Repairs/Maintenance and Fixture/Tooling Costs
In Figure 3, each piece of primary equipment is again shown in the first column and direct annual costs are available for the groups of equipment as shown. A weighted factor is assigned to each piece of equipment based on its age and the severity and frequency of repairs. A “1” is used as the average. These factors are then totaled in the third column. Finally, a factor is determined in the fourth column, which is the weighted value for the equipment category. This factor is then multiplied by the category total cost to assign the proportion of the cost to the individual equipment. This same methodology is used to assign the individual equipment costs for fixtures/tooling.
Gathering Specific Utility-Use Data
To complete the initial cost sheet for a piece of primary equipment, all of the individual contributors to utility use need to be identified and recorded. Knowing the rated utility use for the primary heating source is very helpful. Sometimes this data is given on the original prints furnished with the equipment. Often, 50% of the rated value is a good first estimate of use.
All sources of gas use need to be indentified, including but not limited to gas heaters, burn-off pilots, flame screens, etc. Useful information includes natural gas flows for burn-off burners and flame screens if the gas pressure drop is known.
Identify and record all the electrical use for heating, heaters, motors, fans or blowers as well as the number of each used, the HP and the overall daily-duty cycle for each.
Determining the Cost of Endothermic Generator Gas
The first hourly cost sheet to be prepared is the determination of the average cost of endothermic gas, which is then used as a cost factor for the operational cost of each type of atmosphere furnace. The spreadsheet is shown in Figure 4.
After heading the spreadsheet with the equipment name, date the sheet was prepared and any other applicable details, the actual use and cost data can be entered after all utility-use data is gathered. The columns are titled: Quantity, the number of similar units; Use or Size, size or rating of the similar units measuring units for the component; Duty Cycle, the portion of time cycle the unit is functioning during the heat-treating cycle; Total Use, conversion of the units to the common-use category; and $/Unit of the Yearly Commodity Cost from Table 1. The latter two numbers are multiplied to give the cost per hour for that commodity.
After the direct labor, benefits and total energy costs are calculated, they are totaled, resulting in the total variable cost.
The allocated costs (as applicable) are entered next with the allocated portion entered as “Allocated $/Year.” This number is then divided by the utilized hours/year to give the contribution of the allocated costs to the total cost. The G&A cost ratio is then multiplied by the total direct cost to give that contribution to cost. Finally, the yearly depreciation is divided by the amortization period and then the utilized hours/year to get the contribution of depreciation to the total hourly cost. Finally, the total hourly cost is the total of the last three figures in the right column. The total hourly cost is $6.70, or $2.23/1,000 cf. This figure will be used for the cost of endothermic gas for all atmosphere furnaces.
Representative cost sheets for two of the atmosphere furnaces, the Pacific two-zone batch and the pusher line, are shown in Figures 5 and 6. The same procedure is followed for the endothermic generator except that the direct-cost components were unique to these furnaces. The other unique features added to these spreadsheets are the line for efficiency factor (profit) contribution to selling price. An additional cost component of production/on time was added for the pusher to allow for the longer start-up period that was required.
Table 2 calculates some selling prices per pound based on cycle length. A comparison of the pound prices for a six-hour carburizing cycle shows the pusher price to be $0.02 less per pound ($0.30 vs. $0.32) even though the selling price for the pusher line is $152.88 versus $55.13 per hour for the two-zone batch furnace.
Figures 7 and 8 show cost sheets for two different frequency (RF and 3/10 kHz ) induction hardening machines. The approach is similar, but the categories used for direct costs are different from the atmosphere furnaces. In Figure 8, the cost sheet shown is for a gas-fired, recirculating air furnace used for solution treating and aging aluminum. The selling price for this equipment is $25.13 per hour.
Finally, a summary of all the selling prices for the primary equipment is shown in Table 2.
In order to ensure that all applicable costs have been covered, a separate spreadsheet may be necessary – after the first draft of the cost sheets or after any significant changes in equipment – to look at the totals of the direct personnel assignments, utilities use, assignment of depreciation costs and the use of other commodities to make sure that the desired totals tie out.
Although it is recognized that each heat-treating operation is unique and the prices presented in this paper may not be applicable, the technique presented can be useful in the derivation of accurate costs and prices.
This reasonably simple and methodical system is presented for determining the hourly cost of operation for heat-treating equipment using Excel spreadsheets.
1. Once derived and the commodity uses are balanced, the sheets can easily be updated annually when commodity prices change or when changes in equipment occur.
2. The data can be used to calculate selling prices (per pound or each piece) when the cycle length and loading characteristic are known.
3. When the cost for each piece of primary equipment has been determined, the total sales for the equipment from the cost data can be compared to actual sales to identify specific areas for possible corrective action.
1. ASM Committee on Heat Treating, The Cost of Heat Treating, Metal Progress, American Society for Metals, July 1954, pps. 128-130A.
2. Air and Natural Gas Flow Capacity Chart (SCFH), Hauck Manufacturing Co., Lebanon, PA, www.hauckburner.com.
For more information: Jon Dossett, is a metallurgical engineer with over 48 years in the field of heat treating. He can be reached by phone at 520-825-7191 or e-mail at email@example.com.