Business Papers

Slide #

Topics

Narration

Slide 1

Scene 1

Semi-large building (VectorCal) and have avatar inserted to represent her entering the building

Slide 2

Scene 2

Introduction to the week

Takes place in Dominic’s office

Dominic then leads Sally down the hallway to Luke’s office

Dominic: Hello again Sally! How did everything work out last week during your time with Luke?

Sally: Hi Dominic! It was another productive week with Luke; he really emphasized the importance of examining labor costs and showed me several methods his department utilizes when working with these costs.

Dominic: Luke is quite right, those concepts are very important and something we put due diligence in during our analyses. It sounds like you and Luke had quite the learning experience last week (laughter) I’m glad to hear you learned a lot and gained valuable experience working in his department.

Jake has been requesting some extra assistance this week, so I will have you working with him this week. He told me he was working on something special and that his project would be something that would interest you. Please be sure to pay attention to what Jake goes over with you this week.

Sally: I will definitely pay attention to what he goes over, as I’m sure it will be very useful for future projects I may be assigned. I’m really excited to get started and see what he is working on!

Dominic: I’m glad to hear that, let’s now make our way down to Jake’s office now.

Slide 3

Scene 3

Jake’s office to go over key concepts related to material costs

Dominic leaves

Dominic: Good morning Jake! I have brought Sally down at your request for some extra help on the project you were telling me about.

Jake: That is right! I am working on this project that deals with analyzing material costs for a company.

Dominic: That is fantastic! I told Sally to pay very close attention to what you go over; as it may be helpful for future projects I may assign her.

Jake: I will be sure to give her a lot of information to prepare her for possible future endeavors. This project is very important and I’m sure it will serve as a great learning experience for Sally!

Dominic: That would be great! Thanks again Jake and good luck this week Sally!

I can’t wait to hear about the project when I see you next.

Take care!

Sally: See you later Dominic and I will be sure to provide you with an update of what I learned this week.

Slide 4

Scene 4

Jake’s office to go over key concepts related to material costs

Jake: Welcome back Sally! As Dominic told you, I am working on a special project involving material costs. This project was a little more than I could handle and this is where you come in. You will be assisting me with this project and seeing it through. However, before we can work on this project let me get you up to speed with some key concepts that will assist you.

Sally: That sounds great and I think that will really help me. Before we get started could you tell me more about direct material costs? I recall that I have heard this term before but am not sure if it goes with what we will be discussing.

Jake: This term direct material costs, has a lot to do with what I will be sharing with you. Keep in mind that a direct material cost is the cost of significant materials that are used in the manufacturing of a product or that are used up in providing a service. For the project we will be working on, the direct material costs will be specifically identifiable to the contract issued.

The direct material costs we will be using would include items the buyer expects to buy, specifically for the contract and the inventory on hand to be consumed when performing the contract. Several companies, however, do not attempt to charge for every item, no matter how small in cost, to a specific contract or job. Many companies feel that by charging for every item, this becomes too much trouble and leads to administrative costs that exceed the value gained by charging for these items.

Sally: That makes a lot of sense and I can see now why direct material costs are so important. I do have a question though, are there any Federal Regulations for how we track this information?

Jake: That is an excellent question! Federal Regulations contain the instructions for submitting a contract-pricing proposal. These instructions will then elaborate on the general instruction by adding instructions for various material categories. Some of these material categories include the following:

Subcontracted items;

Standard commercial items;

Inter-organizational transfers;

Inter-organizational transfer at cost;

Raw materials; and

Purchased parts.

There is also an analysis of proposed estimated materials costs that is run. This analysis of estimated costs for materials is done essentially the same way as for estimated direct labor costs.

Sally: It seems that the tracking can be quite involving but I’m glad to see that VectorCal has the resources to assist in this tracking. I remember how to analyze estimated direct labor costs, so I am thankful that the estimation of material costs is very similar.

Slide 5

Scene 5

Jake’s office to go over key concepts related to material costs

Jake: That is great to know! I’m sure you will be able to explain how one would estimate direct material costs and the level of involvement needed during this estimation process. Do you want to give it a shot?

Sally: I feel I have a good understanding of this topic, let me give it a try. I recall that estimating direct material costs can be done either alone or together with others. However, I believe that the statistical approach is rarely used, although it may be the only method that can be used when there are a lot of uncertainties about what will be needed and how much. It is to the best of my knowledge that this uncertainty can occur in the very early stages of the research and development of equipment never made before.

Jake: Very good job Sally! You are absolutely correct. Another important method that is used is referred to as the priced bill of sales method and it uses a detailed list of all materials needed to produce the required products.

The buyer will usually use this method when the equipment design is well established, or when minor adjustments of a present design are required.

Keep in mind though, that if a firm has made the product before, preparation of the priced bill of materials is fairly straightforward. In practice, however, even ordinary equipment items may have hundreds or thousands of parts or assemblies.

Sally: That is very interesting indeed and I’m glad you shared that with me, I had no idea this method was so involved. I’ve noticed that in your department there is a lot of time spent collecting data on the average unit material costs. Why is it so important to have a projection for the average unit material cost?

Jake: That is a fantastic question, let me explain to you how this works. Many companies will have data for the unit material cost of a product if they have made that product before. These companies may then show a token reduction in unit material costs, but this token reduction is not likely to produce a good estimate. In cases like these, it is required that the company must give you a lot more information than the mere material cost revision.

Sally: Wouldn’t it be helpful to require the company to prove its case by using the learning curve?

Jake: Right you are! Keep in mind though that by using the learning curve it will produce realistic estimates in some industries for some costs. It is also important to segregate direct material costs when attempting to use the learning curve. We sometimes see that some material costs can be projected reasonably well with a learning curve, while others cannot be predicted reliably using the curves.

Sally: I understand now that sometimes learning curves can be beneficial and other times they might not be.

Jake: I now want to talk about projecting the unit price of materials. First off, it is important to note that proposed unit prices can be validated by using price analysis techniques. There are also several comparisons to unit prices paid by the government to purchase the same or similar items, and using a comparison to catalog prices as a widely used method. Keep in mind that the general tone of the company’s cost submission and the thoroughness of support documentation often give strong evidence of its overall reliability. Why do you think companies will often make these estimates?

Sally: I believe that companies may often have to estimate certain unit prices, generally because of insufficient time to submit a proposal by the deadline. I also recall that several of these companies will use the time available after a proposal submission but prior to the price discussions to do further research on their pricing estimates.

Jake: Great response! It is quite common for companies to estimate the prices to continue a project or to make up time lost during the pricing process.

Slide 6

Scene 6

Jake’s office to go over key concepts related to material costs

Sally: I recently had a meeting that included Dominic and some investors. During the meeting I heard several times, the topic of direct material cost estimates. Could you go over this concept with me?

Jake: Sure thing! Direct costs are totally allocable to the contract. When you agree to a cost proposed deemed as direct, you are agreeing to pay one hundred percent of it. When you also agree to a direct cost, you may also have agreed to a separate and related indirect cost. Sally, what do you recall about indirect costs?

Sally: I recall that indirect costs often depend on some or all of the direct costs, such as direct labor, direct material, or both.

Jake: That is correct. Therefore, your agreement to the direct charge also means that you agree to a related part of the indirect cost. Keep in mind that a good analysis is also important for other direct costs, such as travel and consultants. Your agreement to pay some of the costs for any of these items is a tacit agreement to pay for them in full.

Sally: Is it true that if the government agrees with the proposed costs in the direct materials estimate, it is saying that those costs are reasonable?

Jake: That is quite true! The resulting cost will be one hundred percent allocable to the proposed contract. We often use cost reimbursement contracts when the cost of performance is highly unpredictable. This factor can apply just as much to materials as to the more commonly considered direct labor costs. Keep in mind, however that sometimes companies may not be able to accurately predict the type and quantities of materials they will need.

Sally: I’m glad to hear that I have a good understanding of this concept. Are there any other direct costs I should know about?

Jake: There are numerous other costs, aside from direct labor and direct material, which can be appropriately listed as direct costs by a company. These costs may include special tooling, travel, computer and consultant services, and federal excise taxes. For costs that might be in either category, direct cost or indirect cost, you may require an explanation for designing them as direct. You must also be sure that the company handles these costs the same way in both private and government contracts.

Sally: I had no idea there were that many other costs! Thanks again for clearing that up for me.

Jake: Not a problem at all! I am glad I was of assistance to you throughout the week.

Before we get ready for our weekly review, I would like for you to go through a review activity I have prepared to help you better grasp some of the concepts we covered this week.

Slide 7

Scene 7

Tab interaction that will have audio for each tab.

Users will click each item and be greeted with images and narration.

Jake: Direct Material Costs are specifically identifiable to the contract. They include items the offer expects to buy specifically for the contract and an inventory on hand to be consumed in performing the contract.

Jake: Submission Requirements for Material Costs are federal regulations that contain the instructions for submitting a contract pricing proposal. The instructions elaborate on the general instruction by adding instructions for various material categories. These material categories include:

Subcontracted items;

Standard commercial items;

Inter-organizational transfers; and

Inter-organizational transfers of cost, raw materials, and purchased parts.

Jake: Projection of Average Unit Material Cost is based off of data dealing with the unit material cost of a product a company made before. Companies may show a token reduction in unit material costs, but this token reduction is not likely to produce a good estimate. There are often requirements that require more information than a mere material cost revision when provided.

Jake: Direct Material Cost Estimates are formed when you agree to a cost proposed deemed as direct. This means that you are agreeing to pay one hundred percent of the costs. Keep in mind however that when you agree to a direct cost, you may also have agreed to a separate and related indirect cost.

Slide 8

Scene 8

Check Your Understanding

Drag and Drop with key concepts from this week’s lesson.

Drop and drag match correct summary:

· Direct Material Costs

· Submission Requirements for Material Costs

· Projection of Average Unit Material Cost

· Direct Material Cost Estimate

Goes with #1 -- “Direct material costs are specifically identifiable to the contract. They include items the offer expects to buy specifically for the contract and an inventory on hand to be consumed in performing the contract.”

Goes with #2 -- “Federal regulations contain the instructions for submitting a contract pricing proposal. The instructions elaborate on the general instruction by adding instructions for various material categories. The categories are: subcontracted items, standard commercial items, inter-organizational transfers, inter-organizational transfer at cost, raw material, and purchased parts.

Goes with #3 -- - “Offers usually have data on the unit material cost if they have made a product before. Offers may show a token reduction in unit material costs, but this token reduction is not likely to produce a good estimate. You should require the offer to give you a lot more information than a mere material cost revision.”

Goes with #4 – “When you agree to a cost proposed as direct, you are agreeing to pay one hundred percent of it. When you agree to a direct cost, you may also have agreed to a separate and related indirect cost.”

Slide 9

Scene 9

Conference room with Jake to go over the week’s key points

Jake: Great work on the review materials. I think you really have a solid foundation for the concepts we discussed this week.

I would now like to summarize what we went over this week to fill in any gaps you may have had. Please feel free to add on to anything I say as we go through.

Sally, do you want to begin this review?

Sally: Sure thing! I first learned that a direct material cost is the cost of significant materials that are used in the manufacture of a product or that are used up in providing a service. I recall that the direct material costs are specifically identifiable to the contract. We also covered the concept of estimating direct materials costs and I saw that this is very straightforward. I also noted that contractors predict unit costs using methods very similar to procedures the government and private companies use for price analysis.

Jake: Very good! Next, we identified that a material cost is the cost principle providing general guidance for the allow-ability of material costs and related topics. We look at several material costs such as raw materials, parts, subassemblies, and manufacturing supplies. I also went over the importance of federal regulations dealing with material costs and how they sometimes contain useful guidance. 

Sally: After that, we then covered the federal regulations that contain the instructions for submitting a contract pricing proposal. I learned that these instructions elaborate on the general instructions by adding instructions for various material categories.

Jake: I also pointed out to you that the analysis of estimated costs for materials is done essentially the same way as for estimated direct labor costs.

Sally: I definitely made note of that and felt pretty confident about that topic. I later learned about the various ways of estimating direct material costs, and how to do a projection of an average unit material cost. We also talked about two approaches that can be used for these projections and they were the statistical approach and the priced bill of sales method.

Jake: Glad to see you were paying attention to both methods of cost projections! We continued our discussion by talking about proposed unit prices and how they can be validated by price analysis techniques.

Sally: I also recall that we went over the importance of the direct material cost estimate. I remember that direct costs are totally allocable to the contract and that when you agree to a cost proposed as direct, you are agreeing to pay one hundred percent of the costs. I also remember that the same can be said when you agree to a direct cost, as you may have also agreed to a separate and related indirect cost.

Jake: Very good work with the review Sally. To finish up our review, we conclude with the other costs, aside from direct labor and direct material, which can be appropriately listed as direct costs by a company. We saw that these costs may include special tooling, travel, computer and consultant services, and federal excise taxes.

Sally: This review was very helpful and definitely helped me gain a better foundation for future projects I may encounter that deal with these concepts. I think Dominic will be very pleased with what we went over this week. Thank you again for the review and your time this week Jake.

Jake: Not a problem at all! You have been great and I feel that your newfound knowledge will really assist me with future projects I may work on! I look forward to working with you again and please fill in Dominic with what we have been working on this week. I’m sure he will also be pleased with your wide knowledge base of these pricing concepts.

Until we meet again don’t forget to complete your weekly discussion questions based on the key concepts we covered this week.

Have a good rest of the day and I look forward to meeting again soon!