How to Do Should Cost Analysis: Step-by-Step Guide

Knowing what should cost analysis is and knowing how to actually do it are two different things. The methodology sounds logical on paper — but getting it right requires the right inputs, the right sequence, and a clear understanding of where most teams go wrong.

This guide walks through should cost analysis step by step, with a real worked example on a CNC-machined aerospace component so you can see exactly how the numbers build up — and where supplier quotes often diverge from what manufacturing actually costs.

New to should cost analysis? Start with What Is Should Cost Analysis? first.

What You Need Before You Start

Before building a should cost model, gather the following inputs. Missing any of them forces you to estimate, which compounds error at every step.

• Engineering drawing or CAD file — geometry, tolerances, surface finish, and GD&T callouts
• Bill of Materials (BOM) — material specification, grade, stock form, quantity
• Annual volume or batch size — drives tooling amortisation and setup cost allocation
• Target geography — manufacturing cost varies significantly between India, Eastern Europe, and Western markets
• Supplier quote (if available) — what you are benchmarking against

With these in hand, you are ready to build a model that is specific, defensible, and useful in a negotiation room.

The 7-Step Should Cost Analysis Process

Step 1 — Define the Part and Identify the Manufacturing Route

Start by reading the drawing carefully. For each feature — pockets, bores, threads, datum faces — identify which manufacturing process produces it. This is your process route or routing sheet.

Common processes you will encounter:

• CNC milling (3-axis, 4-axis, 5-axis)
• CNC turning / turning + milling
• Sheet metal: laser cutting, punching, forming, welding
• Investment casting or die casting
• Injection moulding
• Surface treatments: anodising, zinc plating, passivation

Step 2 — Calculate Raw Material Cost

Material cost is straightforward but has several hidden variables teams consistently underestimate.

Key inputs:

• Part weight — from CAD (volume × density) or estimated from drawing
• Scrap factor — for a prismatic machined part, bar stock or billet has 30–60% buy-to-fly ratio; castings and forgings are closer to 10–20%
• Material price — use current commodity rates, not last year's budget figure. Aluminium, stainless steel, titanium, and CFRP prices shift significantly quarter to quarter

Regional note: IN-based suppliers sourcing aerospace-grade aluminium (6061-T6, 7075-T6) pay approximately ₹550–700/kg. European suppliers pay €4.5–5.5/kg. US suppliers pay $4.00–5.00/lb. Always model material cost in the target geography.

Step 3 — Estimate Process Cycle Time

This is the most technically demanding step and the one where inaccurate models lose credibility. Cycle time is driven by:

• Material removal rate — spindle speed, feed rate, depth of cut, for machined parts
• Forming or joining time — press tonnage, weld length, robot speed, for sheet metal
• Part complexity — number of setups, datum changes, special fixturing
• Tolerance class — tighter tolerances mean slower feeds, more passes, more inspection

Cycle time also needs setup time (amortised across the batch), inspection time per part, and load/unload handling.

Step 4 — Apply Machine Rates and Labor Rates

Once you have cycle time, multiply by the appropriate rates for the manufacturing geography.

Separate machine and labor costs in your model. If you blend them, you lose the ability to compare the same part across geographies meaningfully.

Step 5 — Add Overhead, SG&A, and Profit Margin

These three layers convert direct cost into a supplier's realistic selling price.

• Factory overhead — indirect labor (supervisors, quality, maintenance), factory depreciation beyond equipment, utilities, and building costs. Typically 15–25% of direct cost, depending on factory size and automation level.
• SG&A — management, sales, finance, and IT. Typically 5–10% of total cost.
• Profit margin — for a competitive precision machining supplier, expect 8–15% on standard work and 12–20% on complex or low-volume aerospace components.

Step 6 — Build the Should Cost Summary

Consolidate every layer into a structured cost summary. This is the document you take into negotiations.

Step 7 — Compare Against Supplier Quotes and Act

With your should cost model built, compare it against the quotes received. Three outcomes are possible:

Worked Example: Aerospace Aluminium Bracket

Let us apply this to a real part.

• Part: CNC-machined structural bracket
• Material: Aluminium 6061-T6
• Dimensions: 220 × 160 × 55 mm (billet starting stock)
• Part weight: 0.9 kg | Finished weight: 0.38 kg | Buy-to-fly ratio: 42%
• Process: 3-axis CNC milling (2 setups), anodising
• Annual volume: 500 units
• Target geography: India
• Supplier quote received: ₹5,200 per unit

Common Mistakes in Should Cost Analysis

• Using static material prices — Commodity prices move. A model built six months ago with aluminium at ₹580/kg is wrong today if prices have moved to ₹650/kg.
• Ignoring buy-to-fly ratio — Calculating material cost on finished part weight instead of starting stock weight is the single most common error in manual models.
• Applying a single overhead rate to all processes — A high-automation machining cell has a very different overhead profile than a manual welding bay. Blending them hides cost.
• Not adjusting rates for geography — Running an India-based should cost model with German machine rates will make every Indian supplier look impossibly cheap.
• Treating should cost as a one-time exercise — Should cost models must be refreshed when material prices change, designs are updated, or supplier capacity shifts.

Manual Should Cost Analysis vs AI-Powered Platforms

For organisations running should cost analysis on dozens of components per quarter, manual spreadsheets become the bottleneck. AI-powered platforms solve the scale problem without sacrificing accuracy.

How Emithran Automates Should Cost Analysis

Emithran's platform takes your BOM or CAD file and builds a should cost model automatically — applying calibrated process rates, live material prices, and regional labor and machine benchmarks to every line item simultaneously.

What this means in practice:

• A 150-line aerospace BOM that would take a cost engineer two weeks to model manually is ready in an afternoon
• Design changes propagate automatically — no manual rework
• Supplier quotes are benchmarked against should cost in real time
• Cost justification reports are generated automatically for procurement negotiations

Built on real manufacturing data from precision CNC operations, Emithran's models reflect actual ground-level economics — not generic textbook cost factors.