Implied Dividend Growth Rate
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The Financial System and Basel Accords
In the previous articles, we have already read about how banks are the main pillars of the financial system. It is obvious that since banks are so important to the economy as a whole, the government must create a system to protect these banks from collapsing in case a negative economic event occurs. Governments all […]
A Primer on Bills of Exchange
What are Bills of Exchange? A bill of exchange is a promissory note that is usually issued by the buyer to the seller of goods in return for the goods. The seller would like to sell their goods for cash. However, in certain cases, the buyer may not have cash immediately at the moment. However, […]
Lockbox Service Provided by Banks
What is a Lockbox ? Lockbox is an additional service provided by banks in the United States. This service allows companies to drastically cut short or even eliminate the tasks that need to be performed by accounts receivables departments. The logic behind the lockbox system emanates from the concept of economies of scale. When every […]
What is Ratio Analysis ?
Ratio analysis is one of the oldest methods of financial statements analysis. It was developed by banks and other lenders to help them chose amongst competing companies asking for their credit. Two sets of financial statements can be difficult to compare. The effect of time, of being in different industries and having different styles of […]
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.
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