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Analysis of Direct Cost

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Submitted By kelvinjt
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Analysis of Direct Cost
November 27, 2011

Direct labor cost is the prices charged for the production of specific goods or services. Direct costs refer to materials, labor and expenses related to the production of a product. Direct labor is labor directly associated with the work being produced (Murphy, p. 98). Other direct labor is labor readily identifiable with a particular objective such as a contract and labor important enough to warrant identifying and measuring so we can keep up with its cost (Murphy, p.99). Companies use systematic procedures, work breakdown structure and phase diagrams to estimate direct labor cost. One of the most widely used methods to estimate labor cost is the work breakdown structure or WBS (Murphy, p.101). The phase diagram is very similar to the WBS except that the detail of the work is spread out over a longer time period. To effectively analyze direct labor cost, you need to establish a model or standard rate. The standard rate is an estimate of what you expect the direct cost of labor will be under normal conditions. To accurately measure direct labor cost, you must include all expenditures, not just wages. Two primary components of a model is the projected cost of one hour of direct labor and the number of labor hours required to produce one unit. Other direct costs are often the type of cost that the firm would normally charge as an indirect cost, but the proposed contract requires a large, unusual, or one-time expenditure for example a special tool that will benefit only the proposed contract. When you agree to the direct or other direct cost of labor you are saying that this is the cost you are going to charge to complete the work. If you under estimate yourself on direct cost on your contract, you will have to eat your overage depending on the type of contract you negotiated. Over estimated on direct cost

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