What is Setup Cost?

Setup cost is those costs incurred to configure a machine for a production run. This cost is considered a fixed cost of the associated batch, so its cost is spread over the number of units produced. Setup costs include the following:

The labor to position tools and materials next to a machine
The labor required to configure a machine
The labor required to train employees on how to process the new production run
The scrap cost of test units run on a machine
The cost of the quality assurance staff who test the initial output of the new production run

The real cost of a setup is the time wasted while a machine is not operational, since this can represent lost income (if there is a backlog of work). In addition, when setup times have been minimized, this creates more productive capacity, which can generate more throughput for a business when the setup happens to be associated with a bottleneck operation. Consequently, there is usually an emphasis on shortening equipment setup times in order to reduce setup costs and increase throughput.