Question

Assume that your company sells portable housing to both general contractors and the government. It sells jobs to contractors on a bid basis. A contractor asks for three bids from different manufacturers. The combination of low bid and high quality wins the job. However, jobs sold to the government are bid on a cost-plus basis. This means the price is determined by adding all costs plus a profit based on cost at a specified percent, such as 10%. You observe that the amount of overhead applied to government jobs is higher than that applied to contract jobs. These allocations concern you. Point: Students could compare responses and discuss differences in concerns with allocating overhead.

Required Write a half-page memo to your company’s chief financial officer outlining your concerns with overhead allocation.

Answer 1

Memorandum

To

The cheif financial officer

From

Date

Subject : Problems of overhead allocation

Sir

While allocating overheads costs to government jobs shows high than others issued to contractors,so we should considers this as a major one and i have concerns in the following areas

1.Cost drivers are to bestrictly implemented so that cost should be reduced to minimum and as a result of that we can reduce our overhead cost

2. overhead rates in government jobs shows some hike that shows inproper application of cost centre concepts so cost control measures should be properly implemented variance analysis should be done on a regular basis

3.Activity Based Costing concepts should be implemented so that majority of overhead cost were converted in to direct costs

As the overhead rates are high while make a comparison with others its better to reduce them as it woulld reduce the rate of wining the bids because bids with low cost and good quality shoud be selected all time. In case of government contracts also if the overhead rates stands high the overall conttract price stands high as we focus on cost plus contracts were cost plus a certain percentage of profit is charged on contracts.So we should try to reduce the overhead cost to minimum by implementing better technicial and advanced tools of costing.