Should-Cost Analysis

Should-cost analysis is a cost estimation technique used to determine the ideal or target cost of manufacturing a product or component, taking into account direct materials, labor, overhead, and other related factors. This analysis is often used by purchasing and procurement teams to assess supplier quotes, evaluate cost structures, and identify potential areas for cost reduction. For example, a manufacturer might use should-cost analysis to calculate the expected cost of producing a machined part, based on its complexity, material requirements, and machining time. By comparing these estimates to actual supplier prices, manufacturers can negotiate better terms, identify inefficiencies, and optimize production costs. It also enables manufacturers to understand cost drivers and make more informed decisions regarding outsourcing, process improvements, or material substitutions.