Direct costs refer to the costs that contractors can identify and charge of a sponsored project (Drury, 2008). They include employee benefits, salaries, equipment, materials and supplies. Department managers can be extremely resourceful in providing updated figures for fringe benefits and salaries, which can enable contractors to estimate direct costs. Overestimation and underestimation of the direct costs are qualified to be among the most common problems that take place in the analysis of direct material and other costs. Various projects, such as the restoration projects, usually experience the problem of overestimation (Drury, 2008). Research has shown that many contractors get into trouble because of this problem.
Contractors have responsibility of looking for the most appropriate resolutions to the problem of overestimation or underestimation of direct costs (Drury, 2008). They can either provide their customers with numerous complete contracts or open ended contracts for customers to understand requirements of the contract before hand. An example of a restoration project would be replacing a concrete wall, in which a contractor replaces the sheetrock. The contractor should include completed contracts that cover replacing insulation, sheetrock, and studs. When contractor submits a contract to the homeowner, it is necessary to inform the homeowner that tearing of the sheetrock will be the only way to reveal condition of the wall. The other alternative is to leave contract that is open ended concerning replacing sheetrock and any other additional damage that contractor and homeowner will discover later during the reformation (Drury, 2008).
It is apparent that overestimation or underestimation of direct costs is the most common problems that contractors encounter, especially on restoration projects. The easiest solution to this problem is leaving the contract as open ended or as the one that supplies the client with a number of contracts which cover all requirements of the job. Complete contracts can provide clients with enough information, which will help them understand any particular process. This will protect both contractor and customer from incurring extra expenses against their expectations. After a careful cost analysis, customers will incur a reasonable cost and contractors will make reasonable profits (Drury, 2008).
Forecasting the Price of an Acquisition
Price on an acquisition refers to the amount payable for the assets that company acquires (Murphy, 2009). Various assets may have varied rates of depreciation depending on their durability as well as their costs. The process of forecasting the price of an acquisition is as follows:
- Defining the purpose of forecast;
- Developing forecasting plan;
- Defining program characteristics;
- Determining forecasting structure;
- Identifying ground rules;
- Obtaining data;
- Developing a forecast;
- Conducting sensitivity analysis;
- Carrying on uncertainty and risk analysis;
- Documenting the estimate;
- Presenting the forecast to undergo approval;
- Updating the forecast.
Calculate Semi-variable Costs
Semi-variable cost refers to an expense that contains variable-cost and fixed-variable components (Murphy, 2009). The fixed-cost component is inclusive in the cost that company must pay regardless of how the entity has achieved various activities. A variable-cost element is inclusive in the cost that is payable with respect to how an entity achieves various levels of activities (Murphy, 2009). The process of calculating semi-variable costs is as following:
- Identifying high and low activity levels;
- Identifying high and low figures;
- Finding the Variable Cost per unit;
- Determining fixed costs;
- Stating the cost equation.
Allocating Direct and Indirect Costs
As it was stated earlier in the paper, direct costs refer to the costs that contractors can identify and charge of a sponsored project including employee benefits, salaries, equipment, materials and supplies. (Drury, 2008). On the other hand, indirect costs refer to the costs for services or activities that benefit two or more sponsored projects within an organization. Examples of indirect costs include the costs for telephone calls, postage and printing, computer use, equipment rental, just to mention a few (Drury, 2008). The process of allocating costs begins with the allocation of indirect costs followed by allocation of direct costs.