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    Case 15-2. Dixon :ompany: 15-201.l Compo1ition of Total Co1t. The Total Cost of A Concraet Is The

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    Jayesh W
    1. The treasurer of Dixon Company should be concerned about classifying labor costs properly under its contract with Mayer Company because the contract bases payment on a cost-plus model where overhead is calculated as a percentage of direct labor costs. 2. Items like piecework earnings, day wages for productive work, and inspectors' pay seem appropriately classified as direct labor, while payments for idle time, union meetings, and maintenance could be indirect labor given their less direct connection to production. 3. The definition of direct costs could be more precise by providing clearer guidelines for distinguishing direct versus indirect labor costs, which have financial implications under this contract.

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    Case 15-2. Dixon :ompany: 15-201.l Compo1ition of Total Co1t. The Total Cost of A Concraet Is The

    Uploaded by

    Jayesh W
    34 views2 pages
    1. The treasurer of Dixon Company should be concerned about classifying labor costs properly under its contract with Mayer Company because the contract bases payment on a cost-plus model where overhead is calculated as a percentage of direct labor costs. 2. Items like piecework earnings, day wages for productive work, and inspectors' pay seem appropriately classified as direct labor, while payments for idle time, union meetings, and maintenance could be indirect labor given their less direct connection to production. 3. The definition of direct costs could be more precise by providing clearer guidelines for distinguishing direct versus indirect labor costs, which have financial implications under this contract.

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    Dixon Company

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    1. The treasurer of Dixon Company should be concerned about classifying labor costs properly under its contract with Mayer Company because the contract bases payment on a cost-plus model where overhead is calculated as a percentage of direct labor costs. 2. Items like piecework earnings, day wages for productive work, and inspectors' pay seem appropriately classified as direct labor, while payments for idle time, union meetings, and maintenance could be indirect labor given their less direct connection to production. 3. The definition of direct costs could be more precise by providing clearer guidelines for distinguishing direct versus indirect labor costs, which have financial implications under this contract.

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    © All Rights Reserved
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    34 views2 pages

    Case 15-2. Dixon :ompany: 15-201.l Compo1ition of Total Co1t. The Total Cost of A Concraet Is The

    Uploaded by

    Jayesh W
    1. The treasurer of Dixon Company should be concerned about classifying labor costs properly under its contract with Mayer Company because the contract bases payment on a cost-plus model where overhead is calculated as a percentage of direct labor costs. 2. Items like piecework earnings, day wages for productive work, and inspectors' pay seem appropriately classified as direct labor, while payments for idle time, union meetings, and maintenance could be indirect labor given their less direct connection to production. 3. The definition of direct costs could be more precise by providing clearer guidelines for distinguishing direct versus indirect labor costs, which have financial implications under this contract.

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    CASEl

    CASE 15-2. DIXON <;:OMPANY


    The Dixon Company made metal parts and subassemblies for
    approximately a dozen manufacturers in the Detroit area. Prior to 1960
    it had_done all this work on a fixed-price basis. In l 96o" the compan;
    negoaated a contraa with the Mayer Company, a large manufacturing
    company. Under the terms of this contract, the Dixon Company would
    devote roughly 40 per cent of its oucput to parts for the Mayer
    . Company. The exact nature and volume of these parts were to be
    determined subsequently. Payment was to be made on a basis of cost
    plus a fixed fee. "Cose" was to be the sum of the direct material, direct
    labor, and overhead cost of the pares. The overhead cost was to be
    calculated as that percentage of direct labor that total overhead in the
    plant bore total direct labor. A tentative overhead rate was to be set
    for billing purposes, and an adjusanent was to be made at the end of
    each year after accual overhead costs and acrual direct labor costs for the
    year had been determined. ·
    The Dixon Company used a simple cost accounting system under
    which most payments to employees were classified as direct labor. This
    classification was not satisfactory to the representative of the Mayer
    Company, and he suggested that the classificac~on should be governed by
    the Armed Services Procurement Regulation, which is the principal
    regulation relating to the determination of costs under U.S. Defense1
    Department contracts. Excerpts from this regulation are quoted b_elow:
    15-201.l Compo1ition of Total Co1t. The total cost of a concraet is the
    sum of che allowable direct and indirect costs allocable co the contract, incurred
    or co be incurred, less any allocable credits. In ascertaining what constitutes
    coses. any generally accepted method of determining or estimating coses that is
    equitable under the circumstances may be used, including standard coses properly
    adjusted for applicable variances.
    • • • • •
    I 5-201.4 Definition of Allocabiii11. A cost is allocable if it is assignable
    or chargeable to a particular cost objective, such as a contract, produet, produa
    line, process, or class of customer or activity, in accordance with the relative
    benefits received or other equitable relationship. Subject to the foregoing, a cost
    is allocable co a Government contract if ic
    ( i) is incurred specifically for the contract;
    (ii) benefies both the contract and other work, or both Government work
    and ocher work, and can be disuibuted to chem in reasonable propor•
    tion to the benefies received; or
    (iii) is necessary to the overall operation of the business, although a direct
    relationship to any particular cost objective cannot be shown.
    • • • • •
    15-202 Direct Co1ts. A direct cost is any cost wh:ch can be identified
    specifically with a particular cost objeetive. Direct costs are not limited to
    irems which are incorparated in the end produce as material or labor. Coses identi·
    fied specifically with the concracr are direct costs of the contract and are to be
    charged directly cherero. Coses idencified specincally with other work of the
    concracror are direct coses of that work and are not co be charged to che contracc
    directly or indirectly. W hen items ordinarily chargeable as indirect coses are
    charged co Government work as direct coses, the cost of like items applicable co
    other work of che contractor muse be eliminated from indirect costs allocated ro
    Government work.
    .
    .A .incl.itea
    • • •
    cost iJ
    L,~
    one which, because of .
    I J-203. J.,Jir.a Cos•~· . obn•cccives. is aor .readily sub jeer co treaanen its11
    incurrmCe for or iomr. 1 ,:na be coosiderecl co be iadiiect t
    a direct cosr. MinOr clircCC cosc iceJIJS Y L- d · ed --~ COsll for
    f naial' Afrer dircCt coses .baff gg.u etemun 111N c:barged i
    .rasons o P try. .,de 15 •PP.topriate. indirect costs are these ·
    directly to the coacnet or other . -.:., le. re-
    be
    maiaia4 co aUocared to rhe several das,1eS w ,ror . ·- . . •
    "j-2Qj.6 ,--,nsMiDfl for P.rs"""1 SMll&es. Compensation for
    ~ - •...• ~ices includes all remwieiacioa paid currently acaued, in whatever
    r;:" aod wbetha paid i,mmediatcly or_ dcfeacd. for services rcadaed_ by em-
    ployees co die (OlltdCEOr during the period ~f con~ perfo~ Jr includes,
    bur is nor Ii.mired ro, s,.laries, wages, direaors •and ~ecuave COJDq:lirtee
    members" fees, boouses ( iodudiog bonuses), mcenav~ • ~ employee
    smck optiom, employee ioswanCC, frlllge beac6rs. and ~nmbuaons ro pemioa,
    aaouiry, and maaagemenr employee incentive compcnsanon plans.

    The rn:aswer of the Dixon Company thought that further discussion


    of this mpic would be desirable. Consequently, he prepaml. with the
    assim~ of bis chief accountant, a list of the types of labor paymcnis
    likely co be iocurred during the life of ~c conuact. Recognwng that the
    magnimde of the expense would enter into the djscuss.ion, be included a
    rough estimate of the monthly anticipated.cost to the Dixon Company
    for each type of labor. This list, wruch was to be used as a basis for
    discussion, follows:
    1. Ear~ngs of piece-me workers ( approximately $25,000) .
    2. Earnings of day-rue workers who worked oo productive work ( approxi•
    marcJy S3,000).
    3. O v ~ payments ( impossible ro estimate; depends on delivery re·
    -4. qwremmrs of Mayer Company) .
    Paymaus ro workers who for some reason or orher were idle ( approxi•

    ~- ::ymmrs
    marely $1,250).
    for time spear xrring up machines ( very roughly $2,000) ·
    · ro wodcers for regular work rime used io amadiog union

    i mecaags ( approsiaiarely $200) .


    '°
    ::ymeau !oraneu aad aaisrancs ( approsimarely $1,800).
    ymmcs ro 1D1pcaurs ( approximarely S600).
    ~·
    1·
    ::ymmra to a5ce Wlt>rlcers ( approximarely $2,600).
    11 Paym,:ms to sw~s ( approximarely $450).
    1i Pa-,mars en ma,nrroan,;c men ( approximately $600).
    13. ,.C roformaa emfloyed in the raw material stOCk room ( $275). .
    . . vaaraon pay ( all the above emp•- bad one wcek s
    ftCaUGll wadi pay each year). -,-
    14. The CDmpanf)'1 conaiburion to old-aor benefit rues (approsi.aialC1Y
    per can o all wages paid). o-
    15. The company's unem , _ . . COi'
    of all waga paid). p..., .......r msurancc tax ( approximatdY 2 per

    a...,...
    1. Should the tteuurer 0f cJiis
    inaner? Why? the Dixon Company be conccmcd al,oU'
    2. In your opinioo, hich • _.IJ l,t
    d•ni6cd as direct labor w 'Y_PCS of payments on the above list SIJIJ..-a,id,
    rhen:fore, included .io over~;hich should be ciassified as indizcCC labot
    3. -Commenr on the useful
    cue. Should ir be madC more prccuc?
    ncss of the defiaitioQ f _,,
    0 wttet coso q
    uoccd ic rbe. .

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