Equipment Cost or Setup Cost - Meaning & Definition

Published by MBA Skool Team, Last Updated: May 25, 2013

What is Equipment Cost or Setup Cost?

Setup cost is defined as the cost involved in making the machine ready for producing a product different in characteristics from the one it is currently producing

Setup cost is directly proportional to the setup time of machine and hence increases with increase in setup time. The setup time decides the flexibility of the organization. Shorter setup time gives higher flexibility and vice versa. Hence organizations generally prefer to reduce setup time which eventually reduces the setup cost.

Setup costs involve the costs of material and labour required to make the machine ready for new production lot. There are two kinds of setup costs: fixed and variable. Fixed costs include the capital expenditure like machine parts required to make the machine ready for new lot. Variable costs include wages of workers, consumables used in setup which vary with the skill-set of the people involved.

Setup costs play an important role in assembly line production. The cost is fixed and gets amortized over the batch size. Hence it is good to have larger batch sizes in order to reduce the proportion of setup cost in the unit cost of the product. 

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 2000 business concepts from 5 categories.

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