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Analysis of Direct Costs Essay


Developing and building a drone is one thing while developing a navigation system is completely another aspect. A drone can be considered a toy without a well-engineered design and functional navigation system. The navigation system is mainly used to give commands to the drone to undertake actions that are compatible with the development of the drone. With all the funds that are put into the development of the drones, the navigation system is developed in manner that cannot be prone to outside interference like hackers, terrorist or anyone that would take over the drones navigation system. It must contain a system that will be able to take commands from a single base irrespective of the geographical condition that the drone is in (Bhimani, Horngren, Datar, Rajan, et al, 2012). A prediction of the main cost that is associated with the VectorCal’s drone navigation system production. There are two main costs associated with the production of VectorCal’s drone navigation system, they are direct labor and material costs. There are also two types of labor costs associated with the production of the navigation system, indirect and direct labor.

Direct labor is labor consumed in areas that have a direct connection with the production or provision of service, and it is produced by skilled workers and business operators. An example would be workers who are in the production line of the navigation system. These employees are welders, cutters, engineers, equipment operators, technicians of equipment, mechanical, production supervisors and any employee directly related to the production of the navigation systems. Indirect labor is labor consumed in the administrative areas of business that support production and trade. Employees who are on the administrative side of the business are what cause an expense, and this cost is indirect because they are not directly responsible for the production of the navigation systems themselves. These employee’s include engineers, assistants, secretaries, drivers, human resources, trainers, marketers and accounting, all employees indirectly related to the production and sale of the product.

VectorCal’s navigation systems have two types of Material costs as well, direct materials and indirect materials. Materials or supplies are the basic elements that are transformed into the finished product through the use of labor and manufacturing overhead costs in the production process. The material costs can be direct or indirect materials are those that can be identified with the production of the finished product, which can be easily seen as part of the product and represents a significant cost of the finished product. Indirect materials are parts or supplies that are involved in the production process of the article, but not classified as direct materials. A good example would be nuts and bolts used in the production process, and as such are considered an indirect materials manufacturing cost. A comparison of the direct and indirect cost that is associated with the navigation system within VectorCal and my company. The main cost within the development of a navigation system for VectorCal’s or Remote Control Unlimited’s drone, will be in labor and material cost.

The labor cost will mainly be used in the acquisition of highly trained and experienced programmers. The programmers will have to work in a team since the navigation system is quite a complex task and numerous ideas are required. One team of programmer can be working on the global positioning and tracking system of the drone while another team will be entitled in safeguarding the system from unauthorized access and interference. It also crucial to note that, the drone navigation system will need constant maintenance and improvement, which is a continuous labor cost. The labor cost can be predicted to vary from $12 million to $16 million only on the system development without taking into consideration the maintenance labor cost. Material cost of the drone navigation system may involve the use of highly specialized pieces of electronics and equipment. In some cases where drones are used for long distance missions, a satellite may be used. The material cost can be predicted to vary from $4 million to $7.5 million depending on the functionality of the drone.

The main cost may be high but this is mainly due to the fact that it is being developed from scratch. After the navigation system is developed, it can be used on multiple drones with the only requirement of maintenance and upgrading the system. The main cost can be considered to be a one off cost that is extremely crucial. The total main cost will range from $16 million to $23.5 million and may need further analysis of hidden costs. The direct cost is seen to be almost similar with extremely little difference in range. However the indirect costs have quite a big difference. VectorCal’s indirect cost will be quite minimal since they will adopt an already working rationale in the development of their drone navigation system. This means that they will follow an example of an already working system and thus reduce mistakes and repetitions that would cost the company quite huge sums of money. The only way to control both the cost is by emulating an already successful idea and learning through it. This reduces mistakes and tends to guide new developments in what to do and what not to do.

The result will be saving time and huge expenses (Chadwick, 2002). Compare your company with VectorCal relative to the price of acquisition, semi variable costs, and allocated direct and indirect costs of the drone navigation system. The acquisition cost of a fixed asset is the economic sacrifice to acquire the asset and make it ready to be used in an activity. It includes the purchase price and any other necessary expenses such as freight, broker fee’s, registration procedures in the case of goods whose domain must be registered like a drone or airplane. The cost of purchasing function, platform construction, assembly, testing and staff training By comparing Remote Control Unlimited and VectorCals relative price of acquisition, VectorCal price will quite high compared to Remote Control Unlimited’s price, since it is already running and has firm roots within the market.

Also VectorCal has a proven credibility within the market, a thing that Remote Control Unlimited will be striving to acquire. The semi-variable costs are composed of fixed and variable costs, such as salaries are fixed costs, but overtime is considered a variable cost. Both companies direct costs are incurred when purchasing products to ensure the production of the navigation systems, but the indirect costs are those related to administrative salaries, office costs, and membership costs. Setting up a business and running it to profitability is not a simple issue, but it can be simplified with good planning and market research.

Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 – 378.
Chadwick, L. (2002) Essential Finance and Accounting for Managers. Harlow, London, New York, Massachusetts, San Francisco, Toronto, Son Mills, Sydney et.al: PearsonEducation, p.280-281 Direct Labor, Direct Materials, and Overhead, (nd). http://academic.regis.edu/dbush/Accounting/Accounting%20Help/DL%20DM%20OH/acc_dl_dm_o.htm Candace Webb, Demand Media, (nd), Labor Cost Vs. Material Cost. http://smallbusiness.chron.com/labor-cost-vs-material-cost-11368.html Definition of ‘Acquisition Cost’, (nd), http://www.investopedia.com/terms/a/acquisition-cost.asp Direct vs Indirect Costs, (nd), http://www.uaa.alaska.edu/research/OSP/direct-vs-indirect-costs.cfm

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