When coming up with direct materials costs, the business is determining how much money is needed to cover the costs of materials and related concepts/items/individuals when it comes to completing a contract. This needs to cover the payment of such items as raw materials, parts, subassemblies, as well as manufacturing supplies which would go into supplying the contract with what is needed. It is important that these items be identified as being needed within the specific contract that is currently being analyzed. In some cases, it is also necessary to figure out the additional costs of transportation and what the related insurance might be but, again, this is on a case by case basis for each contract. Figures for contracts will also need to be adjusted in order to allow for a contract’s overruns, spoilage and defective work. Then, it must be adjusted to cover trade discounts, refunds and other allowances, as well as the sale of scrap (Murphy, 2009, p. 128-129).
When looking at this analysis, there are a number of things which could go wrong with the equation. When it comes to the analysis of direct material, it is important that the costs be consistent for each contract. It is easy to confused material costs when one is not being careful. Other direct costs can have the same problems. It happens sometimes where materials are charged twice, both as direct and indirect. It is important not to charge direct costs is other costs develop for the same reason in similar circumstance. This shouldn’t happen with any contract. There is no reason to pay for the same item twice and it requires diligence to ensure that this doesn’t happen.
Additionally, it is important to determine other applicable factors when it comes to direct material and direct labor costs, as well as any other direct cost related to the contract. The item/material/product must be worth the effort required to track it and keep count. The quantity for the contract must be accurate and specific to the contract. Lastly, it is important to make sure that the cost or the price for the item or material is a reasonable and competitive one (Murphy, 2009, p. 133).
To steel one’s self against problems when it comes to the analysis of direct costs of materials and others, diligence is key. Individuals need to be educated on each contract. They need to pay particular attention to all the details and keep track of how everything is being categorized. Research is also required to insure that individuals are aware of the fair market value of items, as well as labor.
- Murphy, J. E. (2009). Guide to contract pricing cost and price analysis for contractors, subcontractors, and government agencies (5th ed.). Vienna, VA: Management Concepts.