Cost Analysis – Costs Prediction And Direct Vs Indirect costs

Analysis of Direct Costs  

Predict the main costs (e.g. labor cost, material cost) associated with the production of VectorCal’s drone navigation system. Provide a rationale for your response.

The main costs associated with production of VectorCal’s drone navigation system are material costs and labor costs. The company will have to incur two types of labor costs: direct labor costs and indirect labor costs. Labor consumed in areas that are directly connected to the company is known as direct labor. The best example is a group of workers involved in the production line of the navigation system (Reynolds, 2005). Direct labor costs are therefore the expenses incurred on employees such as production supervisors, welders, and equipment operators. Labor consumed in administrative areas to support direct labor is referred to as indirect cost. For example, administrative employees also form part of the company’s expenses and they offer indirect labor because they do not directly contribute to the production of the navigation systems. Indirect labor costs are therefore expenses uncured workers such as human resource managers, secretaries, and drivers (Reynolds, 2005).

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VectorCal’s navigation system will also have to incur both direct and indirect material costs. Every company that produces products to customers requires raw materials which include supplies that are transformed into finished products. For VectorCal to transform raw materials into finished products, it will use manufacturing overhead costs and labor in the production process (Reynolds, 2005). Materials costs can either be direct or indirect. Direct material costs are incurred on supplies that can directly be identified with the production of finished products. Such materials can easily be seen as part of the product and normally forms a significant part of the material costs. Indirect material costs are incurred on supplies that are not directly involved in the production process. For example costs of bolts and nuts can be classified as material costs (Reynolds, 2005).

Compare and contrast the direct and indirect costs associated with the drone navigation system that both your company and VectorCal would assume. Predict whether or not your company could easily control these costs and thus reduce production expenses. Justify your response.

Costs can be classified as either direct or indirect based on how they are associated with production of a specific service or product. Costs that can directly be traced to the final cost object are known as direct costs. Conversely, indirect costs cannot be effectively attributed to a particular cost object. Examples direct costs that both Dronesolution and VectorCal will have to assume are the cost of purchasing equipment, raw materials, and wages incurred on production of concrete (Swift, Ross and Omachonu, 1998). Both Dronesolution and VectorCal will also have to assume a number of indirect costs such as power costs, salaries of production supervisors, and insurance costs (Swift, Ross and Omachonu, 1998). However, since VectorCal has been in business for a long time, it will have to assume cost of depreciation as an indirect cost. Dronesolution will not have to assume cost of depreciation because it is a new business. The fact that Dronesolution will operate in a relatively small market is enough evidence that it will be able to control both direct and indirect costs in order to reduce production expenses.

Compare your company with VectorCal relative to the price of acquisition, semi-variable costs, and allocated direct and indirect costs of the drone navigation system. Justify your response.

Dronesolution and VectorCal have some similarities and differences as far as price of acquisition, semi-variable costs, and allocated direct and indirect costs of the drone navigation system are concerned. Even though Dronesolution is a new business, it can spend an equal amount in acquisition just as VectorCal that has been in business for long. The only difference in price acquisition is the size of the unit that is to be acquired. In addition, both Dronesolution and VectorCal will incur equal amounts of semi-variable because they are dealing with similar products and they are both engaged in the production of drone navigation system. However, VectorCal will allocate more direct and indirect costs in the production of the drone navigation system than Dronesolution because VectorCal is presumed to be larger than Dronesolution (Griffin, 2001).

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