Analysis of Direct Costs
The term direct material cost is used to define any material cost that can be pin pointed to a particular final cost objective. On the other hand, other direct cost is define as a cost that can be specifically associated to a final cost objective that one offering the contract does not consider as direct material cost. The common examples of this cost include; the cost of special tools and computer services that are involved in the process. This article will discuss what is most likely to go wrong in the analysis of direct material and other direct costs and what could be done about it (Lanen & Maher, 2008).
In the course of planning of the direct cost analysis, one may neglect the unsuspicious indicators. This may make the process inefficient and uneconomical. To avoid this, the analysis should look for all the indicators that could show the uneconomical and inefficient practices.it is recommended that in case any element of the proposed other direct cost is suspicious all the attention should be shifted to that element in order to gather enough information about it. One should not concentrate on an element that is not suspicions as much as it may have the same value as the suspicions one (Lanen & Maher, 2008).
Another thing that may go wrong during the analysis is the classification of other direct costs as indirect costs. Ensure that the classification is proper and accurate. For one to tell other direct cost that ought to be placed under the category of indirect cost, one has to consider the following. First, if the cost benefits are both to the intended contract and other contracts, then this cost is an indirect cost. The second thing to look at is the proposed contacts view of the cost. If the proposed contact is of the view that the cost is direct then classify it as so (Lanen & Maher 2008).
The third challenge that may arise in the course of this process is that an individual preparing the estimates of direct labor cost may not be aware that this similar task is being analyzed as other indirect cost. For ease of this assignment and to avoid errors it is recommended that the firm consults an in-house labor consultant to do the job better (Lanen & Maher, 2008).
Another thing that may prove challenging during this process is how to identify a cost that is reasonable. For one to overcome this challenge, he has to bear in mind whether the intended other direct cost is in line with the intended contract’s assumptions.it is recommended that any cost that is not in line with the assumption of the intended contract, then the costs should be queried. Another thing to consider is the value of the proposed other direct cost or direct material cost to the fulfillment of the contract. If it is not necessary for the actualization of the contract then disregard the cost. Additionally you may request the proposed contact to outline any other direct costs that may be needed in order to actualize the contract (Lanen & Maher, 2008).
Another thing that could go wrong is the identification of costs that need to be given special attention. In order for one to identify these costs; he should consider the cost of that indirect cost in proportion to the total estimated cost. If the cost is high, as compared to the total cost, then that item should be given all the due attention it deserves. This is to prevent loses that may follow the inappropriate consideration(Lanen & Maher,2008).
References
Lanen, W. N.& Maher, M. W. (2008).Fundamentals of Cost Accounting.McGraw Hill.
