I’m trying to study for my Business course and I need some help to understand this question.
STUDENT 1 (Jena):
The federal government is spending millions of dollars each year in goods and services. The majority of federal procuring is done by thousands of government contractors and subcontractors (Garrett & Reynolds, T, 2010). Cost accounting systems are utilized to help determine the costs of the contracts by properly grouping direct and indirect costs and ensuring exclusion of unallowable costs. Indirect and direct costs contribute to the contractors estimating systems.
Falling under the scope of direct costs includes: direct material, direct labor, and other direct costs. According to Spielman (2018), “direct cost are expenses that a company can easily connect to a specific cost object which may be a product, department or project” (para. 4). Direct material usually consists of raw materials or parts that are used to complete a contract. Material that can no longer be utilized throughout the contract such as defective parts or expired shelf life items must also be defined as direct materials. Labor can also be included in the direct costs as long as the labor being performed is for a specific project
Indirect costs are equally as important to classify as direct costs. Full comprehension of indirect costs is essential to ensure that you recover all acquired costs and maximize profitability over the course of the company’s fiscal year (Moser & Arviso, 2007). Indirect costs are ones that support the company’s day to day actives and do not support a specific project or contract. An indirect labor example could be the cleaning custodians that clean the company’s restrooms. Since they do not directly affect a certain contract there labor can be considered as an indirect cost. Indirect materials can be things that are utilized on a daily basis but not specific to a project such as the desk you’re sitting at or the seat you’re sitting in.
Garrett, G., & Reynolds, T. (2010). Government Contract Cost Accounting, Part 1: The U.S. Federal Marketplace and the Need for Contract Cost Accounting. Contract Management, 50(7), 34–36,38,40–42,44. Retrieved from http://search.proquest.com/docview/721723814/
Moser, S., & Arviso, B. (2007). Direct and Indirect Cost Structures and Their Impact on Government Audits and Outcomes. Contract Management, 47(2), 58–59,61,63. Retrieved from http://search.proquest.com/docview/196329636/
Spielman, E. (2018, April 20). Direct vs. Indirect Costs: Classifying Business Expense. Retrieved May 20, 2020, from com/5498-direct-costs-indirect-costs.html” target=”_blank” rel=”noopener”>https://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html
When calculating direct and indirect costs, ensuring the appropriate categorization is applied to the cost is important. When considering the production of goods or services, costs that pertain directly to the production of the goods or services are categorized as direct costs. An example of a direct cost would be material costs and labor costs. Indirect costs cover things like warehouse and facility costs and administrative costs that contribute to running the business (Spielman, 2018).
Cost management provides an organized method for direct and indirect costs to be properly accounted for. Costs input into a cost management or accounting system provides tracking and traceability from the raw materials purchased all the way down the line to the production of the final product or services being rendered. Careful management of direct and indirect costs provide the opportunity for improvement and efficiency. It also promotes a reduction in cost waste (Hanid, Koskela, & Siriwardena, n.d.).
Correctly forecasting direct and indirect costs can be difficult. With so many variables that can change, it can be hard to accurately establish cost expectations for a project, product, or service. Innovative technologies with no precedence or historical cost makes identifying the direct and indirect cost of research and development tricky and can lead to inaccuracies (Hanid, Koskela, & Siriwardena, n.d.). Even when historical data is available, there is no guarantee that unexpected direct and indirect costs can appear.
From personal experience through my job, when government contracts are being drafted and a Request for Proposals (RFP) is published, cost estimates come in to play. Government contractors looking to be awarded a contract have to consider the future costs for the potential contract. Gathering cost details and doing so accurately helps them to be prepared should they be awarded the contract but also helps the government to determine whether they are getting a fair and reasonable price. The selection process for a contract is tedious and a real nail biter.
Hanid, M., Koskela, L., & Siriwardena, M. (n.d.). What are the big issues in cost management? Retrieved from https://iglcstorage.blob.core.windows.net/papers/a…
STUDENT 3 (Andrew):
For this week’s forum I will be discussing the indirect costs and direct costs. I will also discuss how indirect costs and direct costs apply to government contracts and government contractors. Indirect costs are costs that are not directly accountable to a cost object. Indirect costs may be either fixed are variable. An example of indirect cost would be accounting and legal expenses, rent, utilities, administrative salaries and etc. Direct Costs is a price that can be directly tied to the production of specific goods or services. An example of a direct costs would be direct labor, direct material, commissions, wages, and etc. For the second part of this forum for this week I will need to discuss how indirect and direct costs apply to government contracts and government contractors. Both Indirect and direct go hand and hand when it comes to government contracts and government contractors. In government contracting, a direct costs is any that is specifically identified with a particular final costs objective (Far 2.101) To find this out you need to ask if the cost would be incurred even in the specific contact did not exist. If the answer is determined to e a no then it is a generally a direct cost. When It comes to indirect costs in government contracting its opposite. Indirect costs are not directly identified with a single final cost objective, but rather with two or more final cost objectives or with at least one intermediate cost objective, such as utilities, rent, etc. Indirect cost will be accounted for in various pools as well.
Spielman, E. (2020). Direct Costs vs. Indirect Costs: What Are They, and How Are They Different?. https://www.businessnewsdaily.com/5498-direct-cost…
com/articles/the-difference-between-direct-costs-and-indirect-costs.html” target=”_blank” rel=”noopener”>https://www.accountingtools.com/articles/the-difference-between-direct-costs-and-indirect-costs.html
Spielman, E. (2018, April 20). Direct Costs vs. Indirect Costs: Understanding Each. Retrieved from Business News Daily: https://www.businessnewsdaily.com/5498-direct-cost…
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