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VectorCal's is a drone browser manufacturer that must estimate the cost just like every other company. She also analyzes the direct and indirect costs of 'Show Me the Way' a lesser manufacturer of these navigation systems. This paper forecasts the key costs of VectorCal and contrasts them directly and indirectly, comparing them to "Show the way."
The cost forecast
Material and labor are the key costs associated with the manufacture of the drone navigation system. Material cost refers to the one of the raw materials such as specialized electronic components, equipment used in assembling the system, and the software. On average, the material cost of developing a drone navigation system by VectorCal varies between $4 and $7.5 million. On the other hand, labor costs are associated with the company’s workforce directly involved in the production (Silveira, 2014), and they include programmers, equipment operators, technicians, production and supervisors, and engineers. The labor costs of developing the navigation system range between $12 and $16 million.
Comparison of the Direct and Indirect Costs
The material and labor costs are in two: direct and indirect material and labor ones. Direct material costs result from materials that are identifiable and are directly chargeable to production. For the case of VectorCal and my company, these direct material costs include the composite plastic material and the electrical switchboard. On the other hand, the indirect material costs represent the materials that are used in production but are not traceable (Drury, 2013) to a particular cost object. For VectorCal, they include the screws, nuts, and wires used to assemble the drone navigation system.
Direct labor refers to the work directly involved in the manufacture of the drone navigation system. It includes employees such as welders, engineers, and equipment operators who are in the production department. On the other hand, indirect labor refers to work that is not traceable to the system, and it is incurred by the administrative functions of companies. It includes the accounting, marketing, and human resources people wages since they are not directly involved in the manufacture of the navigation system.
It is possible for my company “Show me the way” to predict these costs and reduce the overall production expense. The application of inventory control measures which improve efficiency in the purchase, storage, and the usage is crucial in controlling direct material costs (Azzi, Battini, Faccio, Persona, & Sgarbossa, 2014). Greater efficiency ensures the correct material quantities are obtained reducing any over investments, minimizing storage costs because the production system operates continuously, and eliminating excessive wastage and consumption. Strategies for controlling labor costs include reducing employee turnover levels and by scheduling. This optimizes a department’s job demands and automates organizational tasks minimizing administrative costs. It results in increasing levels of employee productivity and efficiency in labor budgeting allowing a corrective action for discrepancies between actual and budgeted labor costs.
Comparison of “Show Me the Way” with VectorCal
Regarding the price of the acquisition, VectorCal’s price should be higher because compared to my company it has been operating for some years and is larger. However, despite the fact that "Show me the way" is smaller, it has established a firm and broad customer base that VectorCal lacks. Show Me the Way has a clear marketing strategy to reach out to its clients while VectorCal still struggles to build customer loyalty. The small size of this company makes it easier to make decisions and control the production costs by improving efficiency overall processes. Even if VectoCal product is not the best, its large size enables it to enjoy economies of scale, and it reports lower manufacturing costs. Therefore, it has a higher price of an acquisition, but the prediction is that my company will surpass it in the next five years.
Semi-variable costs are composed of a mixture of both variable and fixed cost components, where for a certain activity level, they are fixed, and after exceeding this point, they become variable. VectorCal’s will have a larger composition of semi-variable costs because it produces a greater volume of drone navigation systems compared to my company. The cost of labor is the most typical example, where it is fixed for a particular production volume but after a point, the employees work overtime. The overtime component is variable because the cost depends on the number of hour’s individual works. “Show me the Way” produces a small number of these navigation systems and therefore, its semi-variable costs are lower.
Unlike indirect costs, direct ones do not undergo allocation because they are directly traceable to the expense center. VectorCal’s larger production volumes mean it has a larger pool of indirect ones, and therefore, it allocates a greater amount of indirect costs. It will be a larger base of cost pools as a result of its more significant manufacturing processes compared to my company. In this respect, the company allocates more indirect costs to its drone navigation system while “Show me the Way” allocates a smaller amount because of its low production volumes.
Azzi, A., Battini, D., Faccio, M., Persona, A., & Sgarbossa, F. (2014). Inventory holding costs measurement: a multi-case study. The International Journal of Logistics Management, 25(1), 109-132
Da Silveira, G. J. (2014). An empirical analysis of manufacturing competitive factors and offshoring. International Journal of Production Economics, 150, 163-173
Drury, C. M. (2013). Management and cost accounting. Springer
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