Select Page

“Overhead Expenses” Please respond to the following:From the-Activity, compare and contrast the manner in which VectorCal and other businesses that you researched analyze overhead costs.Selecttwo to three (2-3) methods that the businesses in question used for allocating costs for theanalysis of their overhead expenses. Explain your rationale.Week 8 e-Activity Use the Internet or the Strayer Library to research articles on overhead costs for companies like VectorCal. Focus on the processes that are involved in calculating these overhead costs. Be prepared to discuss.Analyze key ways in whichyou would make the most use of the cost analysis in supporting VectorCal’s contract with the federal government.Speculate on what you believe would happen if the cost analysis related to the VectorCal’s current federal government contract changed. Justify your response.bus315_w8_p1.pptxbus315_week_8_scenario_script_10_21_2013_final.docxCost and Price Analysis
BUS 315
Analysis of Indirect Costs
Topics
• To cover this objective, we will discuss the
following topics:

Indirect costs and their types
Methods of allocating overhead cost
Cost analysis of overhead rates
What are Indirect Costs?
• Definitions
– Any cost not directly identified with a single, final cost
objective, but identified with two or more cost
objectives or an intermediate cost objective
– Accumulated by logical cost groupings with due
consideration of the reasons for incurring such costs
• Types of Indirect Costs
– general and administrative (G&A)
• Controlling overhead costs
– increase in the overhead rate leads to price increases
– Overhead rates will decrease as the volume of the
business increases, and vice versa
• The composition of overhead costs

Indirect labor
Costs associated with labor
Indirect Supplies
Fixed Charges
Methods of Allocation
• Methods of Allocating Overhead Cost
– Basic principles
• the overhead cost to be allocated is normally based on the
total overhead cost for a year
• the overhead cost to be allocated is an estimate of the total
overhead costs for the present accounting year
• estimated overhead cost is divided up by a factor called the
basis of allocation
– Unit of Production Method
=
estimated Units to be produced
unit
– Direct Labor Hour Method
Estimated Direct labor hours
=Rate per direct labor
hour
Other Methods of Allocation
• Methods of Allocating Overhead Cost
– Direct Labor Cost Method
Estimated over cost
Percent of direct
labor cost
x 100 =
estimated direct labor cost
– Direct Material Cost Method
Estimated materials cost
x 100 = Percent of direct material
cost
– Prime Cost Method
x 100 =
Direct labor cost + direct material cost
Percent of
prime cost
– Machine Hour Method
Estimated machine hours
=
Rate per machine hour
Under, Over and Exact
Absorption
• Summary of Allocation
– Allocation of overhead is a way to divide overhead
costs
• Underabsorption
– Overhead rate is set too low
• Overabsorption
– Overhead rate is set too high
• Exact absorption
– Can only be calculated after year’s end
Analysis of Overhead Rate
• Analysis of the overhead rate
– Does the allocation method used divide overhead
costs in an equitable manner?
– Are the costs in the overhead cost pool reasonable,
allowable, and allocable?
– Does the allocation base reflect a reasonable forecast
of the expected business volume?
• Location of certain labor-related expenses
– Many companies place labor related expenses in the
– Some companies increase the basic hourly rate to
include its share of these labor related expenses
Cost of Vacation, Holiday, Sick,
Overtime
• Vacation, Holiday, and Sick Pay
– Cost Accounting Standards refer to the cost of
holidays, vacation time, and sick time as compensated
personal absences
– The company that does not have overhead accounts
for compensated personal absences is burying them in
its direct labor costs
• Proper handling of overtime premium costs
– Overtime costs appear in the overhead accounts of
well-managed firms
– Overtime is not an indication of inefficiency unless it is
excessively used
Analysis of Overhead Cost and
Basis of Allocation
• Forward pricing rate agreements
– Can be used to set to set indirect cost rates, labor hour
rates, material handling rates, and a variety of other
cost arrangements
• Analysis of overhead cost
– must be reasonable, allowable, and allocable
• Analysis of the basis of Allocation
– Does the basis of allocation produce reasonably
equitable results?
– Is the figure used reasonably accurate?
Analysis
• The importance of overhead rate analysis
– Firm-fixed-price contracts
• Once the government awards a firm-fixed-price
contract, it is committed to pay that price
– Cost reimbursement
• Used because the costs of performance cannot be
predicted with high accuracy
• government is protected by cost reimbursement
contracts because they are finally settled based on
actual costs incurred
Summary

Indirect costs and their types
Methods of allocating overhead cost
Cost analysis of overhead rates
BUS315 Week 8 Scenario Script: Overhead Expenses and General and Administrative
Expenses
Slide #
Topics
Narration
Slide 1
Scene 1
Semi-large building
(VectorCal) and have avatar
inserted to represent her
entering the building
Slide 2
Scene 2
Introduction to the week
Takes place in Dominic’s
office
Dominic: Good morning Sally! Good to see you
again, I hope you had a productive week with
Luke as you assisted him with his special project.
Sally: Hello Dominic! Last week was very
productive indeed, Luke went over a lot of the
fundamentals involving direct costs and I really
got a firsthand look at the project he was working
on. I left Luke’s office with a really good
understanding of the key concepts he went over
with me.
Dominic: I’m glad you feel that way! I’m sure
that the newfound knowledge will come in handy
with future projects I assign you to work on. I’m
pretty excited to see what Luke comes up with
when I go over his project plan. I’m happy to hear
he was a valuable resource for you during your
time in his department.
government contracting concepts. What should I
expect for this week?
Dominic: I like your enthusiasm! This week you
will be working with me; I have a project that
needs to be worked on, and I thought it would be
beneficial if you worked alongside me this week.
Sally: That is fantastic! I’m ready to get started.
Slide 3
Scene 3
Dominic’s office to go over
key concepts related to
material costs
Dominic: The project we will be working on will
be dealing with indirect costs. With that being
said, I’d like to get you up to speed by going over
some key concepts dealing with these indirect
costs. Based on your schooling, do you recall
anything about indirect costs?
Sally: Yes, I actually do! I recall that an indirect
cost is any cost not directly identified with a
single, final cost objective, but identified with two
or more cost objectives or an intermediate cost
objective. I also remember learning that indirect
costs can be accumulated by logical cost
groupings.
Dominic: That is great that you’ve heard of this
term before, this overview may be easier than I
thought. (laughter)
It is also important to note that overhead and
general and administrative are two categories of
indirect expenses. There are several small
companies, like ours, that have indirect costs that
cannot be identified with various contract jobs,
whether they are government or private.
Sally: Is this why you put these various indirect
costs into overhead and general and
Dominic: You are absolutely correct! But keep in
mind that the government agrees that one
overhead account is enough in such situations.
Sally: That is great to know! I also hear a lot
about the size of our overhead expenses during
our weekly update meetings. Is this something
you monitor closely?
Dominic: We absolutely monitor our overhead
expenses. I believe that good management is
always properly concerned with the close control
of overhead costs. For obvious reasons, overhead
costs should not become too large. Keep in mind
that our company increased its overhead costs
when we purchased all of the modern equipment
and other technical advances to our assembly
process, such as higher quality supervision.
Sally: Why did you elect to raise your overhead
costs? Couldn’t you have continued using the
equipment that was being currently used?
Dominic: That could have been an option for us.
However, if we continued using the outdated
equipment it would have driven up our direct
costs in the process. The trick is to control the
overhead to achieve effective and efficient
operations. At our company some of our overhead
costs include:
Indirect labor;
Costs associated with labor;
Indirect Supplies; and
Fixed Charges.
Sally: That is very interesting! So it seems that by
modernizing your equipment it saved you money
in the long run. Is this correct?
Dominic: You are quite right! When you factor in
tax deductions, we ended up with a net savings of
eighteen percent by modernizing our equipment.
Slide 4
Scene 4
Dominic’s office to go over
key concepts related to
material costs
Sally: That is quite a savings! I can definitely see
why you chose to modernize your equipment.
Dominic: Let’s now talk about the methods of
allocation. There are many ways to allocate
overhead costs, but some basic principles apply to
these methods. One of these methods deals with
the overhead costs being allocated based on the
total overhead cost for a year. Sally, do you know
of any other methods for allocation?
Sally: I recall that there are two more methods
that can be used. I know that overhead costs can
be allocated based on estimates of the total
overhead costs for the present accounting year. I
also remember the estimated overhead costs can
be divided by a factor called the basis of
allocation.
Dominic: Very good Sally, you properly
identified two other methods for allocation. Let
me tell you about one more method that can be
used as well. The direct labor cost method is
another widely used method and works better
than a base of direct labor hours when there is a
wide range of direct labor pay rates. This method
can also be used in a highly mechanized
production operation where material cost is the
major part and labor costs are minor.
Sally: I never knew about that method until now. I
will definitely keep this methodology in mind for
future projects I may encounter.
Dominic: I’m glad I shared that information with
you; this method does come in handy for certain
situations. Take notice that the allocation of
overhead is nothing more than a way to divide
overhead cost. However, a proper overhead rate
is essential for a company to determine its costs
and, ultimately, the price to charge for each of its
products or services.
Sally: What happens if the overhead rate is set too
low?
Dominic: Great question! When the overhead rate
is set too low, the company will not get enough
money from its customers to meet its actual
overhead cost. This shortfall can happen for a
variety of reasons including the estimate of
overhead costs being lower than the actual
overhead. On the flipside, if the overhead rate is
set too high, the company will include more for
overhead in its charges than is needed to meet the
actual overhead costs. The extra money received
during the course of the year adds to the
company’s profit. However, the chance of
absorbing the exact amount of overhead by a
series of many customer billings throughout the
year is rare.
Sally: That makes a lot of sense now; your
explanation definitely made things a lot clearer.
Aren’t there also overhead accounts that often
show line items for the cost of holidays, vacation
time, and sick time?
Dominic: Right you are! These line items are
referred to by the Cost Accounting Standards as
compensated personal absences. It requires that
these items be segregated into an indirect cost
account and allocated to all cost objectives. Keep
in mind that when a firm projects overhead costs
for the current year, it estimates the hours that
employees will be out for the holidays, paid
vacations, and sick leave.
Sally: I thought I was on to something, but am
glad I confirmed this with you. I did have a
question about overhead analyses that I was
hoping you could clear up for me. I know that
once the government awards a firm-fixed-price
contract to a company, it is committed to pay that
price. I recall that since the overhead cost is part
of the price, the government analysis of the
overhead rate must be as precise as is possible
under the circumstances. Am I correct with my
understanding of this?
Dominic: You are correct Sally. Let me just add a
couple things to your response and see if this ties
up any loose ends for you. If you recall, the
purpose of the analysis is to come up with a
bottom line price that is reasonable, remembering
that we can never predict future costs with total
accuracy. We will want to use a cost
reimbursement contract for this process because
the costs of performance cannot be predicted with
high accuracy. Keep in mind as well that the
government is protected by cost reimbursement
contracts because they are finally settled based on
actual costs incurred.
Sally: I’m glad we are on the same page and you
absolutely filled in some gaps I had with my
understanding of this subject.
Slide 5
Scene 5
Dominic’s office to go over
key concepts related to
material costs
Dominic: Let’s now turn our attention to General
and Administrative, or G&AExpenses. Have you
heard of this concept before Sally and if so can
you provide me with an explanation?
I was in school. I recall that the Cost Accounting
Standards define general and administrative
expenses as any management, financial, or other
expense which is incurred by, or allocated to, a
business unit. It is to the best of my knowledge
that general and administrative expenses are also
a type of indirect cost one would probably see any
time a pricing proposal from a company with
several operating divisions is received.
Dominic: Very good Sally, I am impressed! You
must have been really paying attention in that
class. (laughter) You are correct though, these
expenses are the indirect costs incurred at the top
level of a larger company. A company like that
would have overhead cost pools for each of its
operating divisions. In addition, the company
would also have top level costs for operating its
corporate headquarters. These top level costs
involve general and administrative costs and
represent a layer of indirect costs in addition to
Sally: Let me share one more thing with you
Dominic. I remember that the government views
general and administrative expenses as a cost of
doing business. It seems that the government is
willing to pay a fair share of the firm’s general
and administrative expense, subject to certain
rules. I recall that the firm must allocate G&A
expenses by acceptable methods, and the
allocation base must be the same as that used for
other customers.
Dominic: Great work and thank you for sharing
that with me, you brought up a valuable concept
for discussion. Let me expand on your response a
little bit and talk about the allocation of these
G&A expenses. The accounting profession
considers allocation of General and
Administrative expense to be a very difficult area.
Even though it is a category of indirect cost, it
does not behave in the same way as overhead
costs. Make a note that General and
Administrative expenses are different from other
indirect costs. Many of them are more fixed in
nature than overhead costs. They do not vary as
much with changes in business volume and
sometimes, they do not vary at all. Sally, since
you seem to have a good grasp of these concepts,
do you recall anything about the three methods
for allocating General and Administrative costs?
Sally: I sure do and would be delighted to share
this with you! The first method is referred to as
total cost input, which should include all
significant costs representing the total business
activity. The second method would be value
added, which may be used if the inclusion of
materials and subcontract costs would
significantly distort the allocation of the General
and Administrative expense pools. The final
method I remember is the single element cost
input, which may be appropriate for a company
that primarily produces labor intensive services,
with very small material and subcontracted
expenses.
Dominic: Excellent job recalling those three
methods of allocation. You have done great and
your knowledge base is vast in this subject area.
Before we get ready for our weekly review, I
would like for you to go through a review activity
I have prepared to help you better grasp some of
the concepts we covered this week.
Slide 6
Scene 6
Tab interaction that will have
audio for each tab.
Users will click each item and
be greeted with images and
narration.
Dominic: Indirect Costs is any cost not directly
identified with a single, final cost objective, but
identified with two or more cost objectives or an
intermediate cost objective. Secondly, indirect
costs shall be accumulated by logical cost
groupings with due consideration of the reasons
for incurring such costs.
Dominic: Overhead Expenses must be
monitored to ensure that overhead costs don’t
become too large. However, a company also
increases its overhead costs when it buys modern
equipment and makes other technical advances,
such as higher quality supervision. It is also
important to note that these expenses can have
low overhead costs by continuing the use of
outdated equipment and facilities, thus driving up
the direct costs in the process. The trick is to
control the overhead to achieve effective and
efficient operations.
Dominic: Importance of Overhead Analysis
deals with the government awarding a firm-fixedprice contract and requiring the end user to be
committed to pay that price. Because overhead
cost is part of the price, the government analysis
of the overhead rate must be as precise as is
possible under the circumstances. The purpose of
the analysis is to come up with a bottom line price
that is reasonable, remembering that we can never
predict future costs with total accuracy.
Dominic: General and Administrative
Expenses are defined as any management,
financial, and other expense which is incurred by,
or allocated to, a business unit and which is for
the general management and administration of the
business unit as whole. General and
administrative expenses are also a type of indirect
cost you will probably see any time you get a
pricing proposal from a company with several
operating divisions.
Slide 7
Slide 7
Drag and Drop with key
concepts from this week’s
lesson.
Drop and drag match correct
summary:

Indirect Costs
Analysis
General and
Goes with #1 — “First, an
indirect cost is any cost not
directly identified with a
single, final cost objective,
but identified with two or
more cost objectives or an
intermediate cost objective.
Second, indirect costs shall be
accumulated by logical cost
groupings with due
consideration of the reasons
for incurring such costs.”
Goes with #2 — “Overhead
costs should not become too
large. However, a company
also increases its overhead
costs when it buys modern
equipment and makes other
technical advances, such as
higher quality supervision. It
can have low overhead costs
by continuing to use outdated
equipment and facilities,
driving up direct costs in the
process. The trick is to
control the overhead to
achieve effective and efficient
operations.”
Goes with #3 — – “Once the
government awards a firmfixed-price contract, it is
committed to pay that price.
Because overhead cost is part
of the price, the government
analysis of the overhead rate
must be as precise as is
possible under the
circumstances. The purpose
of the analysis is to come up
with a bottom line price that is
reasonable, remembering that
we can never predict future
costs with total accuracy.”
Goes with #4 – “Cost
Accounting Standards define
expenses as any management,
financial, and other expense
which is incurred by, or
allocated to, a business unit
and which is for the general
management and
unit as whole. General and
administrative expenses are a
type of indirect cost you will
probably see any time you get
a pricing proposal from a
company with several
operating divisions.”
Slide 8
Scene 8
Conference room with Jake to
go over the week’s key points
Dominic: Great work on the review materials.
You did excellent and I think you really have a
solid foundation for the concepts we discussed
this week.
I would now like to summarize what we went
over this week to fill in any gaps you may have
had. Please feel free to add on to anything I say as
we go through.
Sally, do you want to begin this review?
Sally: Sure thing! First, we learned that an
indirect cost is any cost not directly identified
with a single, final cost objective, but identified
with two or more cost objectives or an
intermediate cost objective. I learned that
overhead and general and administrative are the
two categories of indirect expenses.
Dominic: I then talked about some methods that
can be used to allocate overhead costs. I also went
over some basic principles that applied to the
methods we covered.
Sally: After that, we talked about conducting an
analysis for the overhead rate. We also talked
about some of the overhead costs, like vacation,
holiday and sick pays which I learned was
referred to as compensated personal absences.
Dominic: I also stressed the importance of
carefully analyzing overhead costs. I told you to
keep in mind that once the government awards a
firm-fixed-price contract, it is committed to pay
that price. I also explained that the overhead cost
is part of the price and the government analysis of
the overhead rate must be as precise as is possible
under certain circumstances.
Sally: I definitely took notes when we went over
that section, there was a lot of information I
thought was important. I then learned that the
General and Administrative Expenses are any
management, financial, or other expenses which
are incurred by, or allocated to, a business unit. I
also noted that the government views general and
administrative expenses as a cost of doing
business and is willing to pay a fair share of the
firm’s general and administrative expense, subject
to certain rules.
Dominic: Glad to see you were paying attention
when we went over that concept! We continued
our discussion by addressing the allocation of
General and Administrative expenses. We talked
about this area being very difficult since it is a
category of indirect cost, yet does not behave in
the same way as overhead costs.
Sally: I recall the last thing we went over were the
three allocation methods of General and
Administrative expenses. I went over these three
methods with you and determined that the
methods consisted of: total cost input, value
added, and single element cost input.
Dominic: Good work with the review Sally. You
did really well this week with the concepts we
went over.
Sally: Thank you Dominic! This review was very
helpful and I feel that I have really grasped the
key concepts discussed this week. I believe I am
very confident assisting you with future projects!
Dominic: I would gladly have your assistance on
other projects; you have done a great job thus far
during your internship. I look forward to working
with you again.
Until we meet again don’t forget to complete your
weekly discussion questions based on the key
concepts we covered this week.
Have a good rest of the day and I will see you
next week!

Purchase answer to see full
attachment

#### Why Choose Us

• 100% non-plagiarized Papers
• 24/7 /365 Service Available
• Affordable Prices
• Any Paper, Urgency, and Subject
• Will complete your papers in 6 hours
• On-time Delivery
• Money-back and Privacy guarantees
• Unlimited Amendments upon request
• Satisfaction guarantee

#### How it Works

• Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
• Fill in your paper’s requirements in the "PAPER DETAILS" section.
• Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
• Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
• From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.