Separation of Investing and Financing Decisions
We have already seen that there are a lot of differences that arise between what we have learned in accounting and how we use it in corporate finance. The separation of financing and investing decisions is one such important concept. It is important because we have to make a very important adjustment based on this […]
Two Period Dividend Discount Model
The next step towards understanding the dividend discount model is to extend the conclusions derived from the single step dividend model. This brings us to the two period dividend discount model. In this model we will use the same logic. However, we will extend the assumption regarding the holding period. Instead of selling his stock […]
Black Wednesday of 1992: The Day the Pound Sterling Came Under Attack
The Black Wednesday of 1992 refers to the momentous day when the British Pound was under attack by currency speculators. This day created history in the Foreign Exchange markets because of the fact that the Pound was considered to be one of the strongest fiat currencies in the world. In fact it was the reserve […]
Notional Pooling – Meaning, Advantages and Disadvantages
Commercial banks provide various types of services to their customers. One such area of service is that of liquidity management. Commercial banks offer several liquidity management arrangements to their clients. Notional pooling is one such arrangement that is very popular amongst corporations that have many subsidiaries. In this article, we will have a closer look […]
Benefits of Fantasy Sports Leagues
In the previous article, we have already seen what fantasy sports leagues are. We also know why sports leagues across the world are trying to associate themselves with fantasy sports companies. This is despite the fact that such sports companies are also heavily criticized by one section of society and they are often said to […]
The first four stages are done before the job is being performed. The final purpose of this is to give a quotation to the clients. The calculation is done based on very little information. However, it needs to be precise. Here is the procedure:
Stage 1: List the Cost ObjectsAt the first stage, organizations need to identify all the possible cost objects that will be affected by taking this job. The idea is to get as close as possible to the perfect estimate
Stage 2: Estimate The Direct Costs:At the second stage, cost objects are segregated into direct and indirect costs. Direct costs are easy to estimate. The company needs to be aware of the amount of material and labour that the job will consume. Once these facts are known, it is easy to determine the amount of direct costs that will go into a job. These estimates are very accurate and seldom need to be revised.
Stage 3: Use Pre-determined Overhead:In the third stage, companies estimate the amount of overheads that will be incurred in the particular job. This estimate is done based on the information that is empirical. This can be contrasted with the direct costs which are estimated based on prevailing market rates. Hence these overhead estimates are almost never accurate. They need to be adjusted at later stages. However, companies try to make the estimates as accurate as possible. This helps them in the next stage.
Stage 4: Give QuotationThe direct and indirect cost estimates are collated. Companies then bid for the job with their quotation. The costs need to be accurate to ensure that the contract is won and also that the company makes a decent profit out of doing so.
When the job is being performed, companies maintain job sheets. They track whether the actual material and labour used as per the quotation. If they are not as per the quotation, then it is an anomaly. Companies can easily trace out the cause. It is either incorrect implementation or incorrect estimation.
After the job is completed, companies check the actual overheads with the estimated overheads. They, then remove the effect of over and under applied overheads to arrive at the final cost of performing the job.
This is quite a lengthy procedure. However, it creates control within the organization and helps ensure that resources are not wasted.
Your email address will not be published. Required fields are marked *
