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As indirect costs are to be calculated as a percentage of the direct costs, the sum of both cost types led him to calculating a far too high price. How should you not react? A. You make the proposal manager aware that a reduction of direct costs may reduce the numbers for overhead cost allocation, but will not influence the actual overheads. B. You reduce your direct cost assessments by reducing the amount of work and the rates allocated to them. This allows a reduction of the overhead costs and a lower price. C. You say that there is no direct link between the price for work to be paid by a customer and the costs occurring on contractor side. It is the sales person's job to make the price. D. Calculating overheads as a percentage of direct costs is just a model to simplify calculations. A more specific analysis of these costs may lead to a more realistic project price.
HI. I'm not clear on what the actual question is; but if it revolves around reacting to a high price, then: There is no need to react. Estimates are just that; an estimate. If someone miscalculates the costs and gives a higher price, then it can always be adjusted down. Be happy it wasn't so low that it would lose money, then you have a real problem.
D - The calculated percentage on direct cost is called predertermined overhead rate, which is based on estimations only. Nowadays, in a large organizations (manufacturing or service-oriented), allocation of Overhead costs are based on activities and its cost drivers. The so-called, Activity-based costing (ABC) systems first accumulate overhead costs for each of the activities of an organization, and then assign the costs of activities to the products, services, or other cost objects that caused that activity.
The capital cost for a construction project includes the expenses related to the inital establishment of the facility:
C. You say that there is no direct link between the price for work to be paid by a customer and the costs occurring on contractor side. It is the sales person's job to make the price.
B. You reduce your direct cost assessments by reducing the amount of work and the rates allocated to them. This allows a reduction of the overhead costs and a lower price.
