Drone Cals Cost Accounting Analysis

Drone Cal’s Cost Accounting Analysis

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DroneCal’s Cost Accounting Analysis

Question 1: Cost Classification for the Navigation system

Indirect costs, taken together, denote the biggest class of expense incurred under navigation contracts. Latest appraisals made by the DroneCal Management, in concurrence with top management on their overhead initiative, show that indirect costs occupy roughly $90 billion of the $170 billion total DroneCal work in development at all the service provider plants (Murphy, 2009). This shows the significance of Ancillary Costs for a break between direct and indirect expenditures for this approximation of the work. As shown, the indirect costs of 15 percent sustained by subcontractors and dealers and the 36 percent incurred by leading service provider indicate approximately 52 percent of the total cost (Murphy, 2009). Indeed, the fraction of indirect cost to the total cost varies considerably among service providers within the navigation industry since it rests upon many factors. That is to say, there are several dissimilarities in both personnel and accounting classifications as to direct or indirect costs, kinds of yields, assembly methods used and degree to which resources are equipped by the federal systems. This is as well as the degree to which subcontractors are used, and the arrangement of amenities’ proprietorship (Murphy, 2009).

Rationale and analysis

The rationale behind the classification of DroneCal’s cost as Indirect cost is that the organization demands more and more mechanical developments (Nevitt, Fabozzi & Mathew, 2000). A corporation is regularly required to improve on acquisition of new resources in order to stay on the foremost edge of expertise and to continue to persist its competitiveness. This will most probably necessitate new procedures, tooling, apparatus, and staff (Murphy, 2009). Product analysis and assessment is remarkably costly as it often encompasses making of sample products. In addition to the study, growth, and industrial efforts of DroneCal’s, navigation prime contractors, will be accountable for administering the work of several subcontractors and vendors who are manufacturing new, very nominal products. DroneCal servicers will be obliged to make vast reserves in tender and application expenses in response to intricate federal and navigation requests procedure (Murphy, 2009). Highly technical management switch systems are essential in order to conform to strict US federal terms for production, manufacturing, and product support (Nevitt, Fabozzi & Mathew, 2000).

Question 2

Determining reasonable, allowable, allocable, variable, fixed & semi-variable costs for the company.

The indirect overhead expenses perhaps may be are composed of fixed overheads of $161 million and flexible costs of $241 million (Bush & Johnston, 1998). Therefore, the variable overhead is $1.5 for every $1 of direct labor or $241 million divided by $201 million. In the first year of operation, the maximum allowable amount for executive compensation for navigation and engineering contractors was $249,000. In the following year, this will perhaps be reduced to $200,000 (Bush & Johnston, 1998). Later, this amount may increase back to its base position of $249,000. The allowable and allocable cost in the contract may be $45 million or more. As well as a total of $40 million may be incurred in manufacturing, of which at least one exceeded $7.6 million during the previous cost accounting period.

Method of Price Analysis

Break-Even Analysis

A rather more refined tactic to cost-based pricing is the break-even analysis. The data required for the method is available from the accounting annals in most firms. The break-even price is the value that will produce adequate income to cover all outlays at a given level of manufacture (Murphy, 2009). Overall cost can be divided into fixed and variable (Total cost = fixed cost + variable cost). Reminiscence that fixed cost does not change as the level of production varies. The rental fee paid for by DroneCal’s premises to house its operation might be an example. No cost is fixed in the end, but in the short run, several overheads cannot credibly be changed. Variable cost does change, as production varies. For example, the cost of raw materials to make the company’s product will vary with production (Murphy, 2009).

One of the limitations of break-even analysis is that it undertakes that flexible costs are constant (Murphy, 2009). Nevertheless, the company’s wages will increase after a while, and shipping discounts will be obtained. Second, break-even assumes that all costs can be carefully classified as fixed or variable. Where marketing expenses are arrived at, break-even analysis will devour an imperative effect on the successive break-even price and capacity (Murphy, 2009).

Upheld mark-up is another significant concept. The maintained mark-up proportion is an important figure in valuing working profits. It also offers an indication of the effectiveness (Murphy, 2009). Maintained mark-up, sometimes called gross cost of goods, is the difference between the real price for which all of the commodities are sold, and the aggregate cash supplied cost of the goods elite of deductions. The maintained mark-up is normally less than the original mark-up due to reductions and stock contractions from theft, damage, and the like (Murphy, 2009).


Maintained mark-up is predominantly significant for cyclical commodities that will probably be marked-down markedly at the end of the time of year. Although this pricing method may seem exceedingly simplified, it has a positive value. The normal mark-up mirrors the actual profitable margins and offer, a good parameter for pricing.


Bush, J., & Johnston, D. (1998). International oil company financial management in nontechnical language. Tulsa, Okla: PennWell.

Murphy, J. E. (2009). Guide to contract pricing: Cost and price analysis for contractors, subcontractors, and government agencies. Vienna, VA: Management Concepts.

Nevitt, P. K., Fabozzi, F. J., & Mathew, J. V. (2000). Equipment leasing. New Hope, Pa: Frank J. Fabozzi Associates.