Definition of Setup Cost
In manufacturing, setup cost is the cost incurred to get equipment ready to process a different batch of goods. Hence, setup cost is regarded as a batch-level cost in activity based costing.
Setup cost is considered to be a non-value-added cost that should be minimized.
Examples of Setup Costs
Setup costs include the following:
- Costs of changing the tools or dies on the equipment
- Preparing and moving materials or components to the equipment
- Testing the initial output to be certain it meets the specifications
In addition to the out-of-pocket costs, such as the labor cost of setting up the equipment, there is also an opportunity cost. The opportunity cost of setting up the equipment is the lost opportunity to manufacture profitable output during the time that the equipment is being set up.