Conclusions and Recommendations.
Aim of the report
The aim of this report to present to the management as to how different type of costs (Direct costs, Indirect Service overhead and administrative overheads) have been allocated to three services provided by the company viz. Software Development, Professional Services and Special Projects. These costs have been calculated with the help of a spreadsheet (For details, please refer appendix). The cost per unit of output for these three services have also been calculated, which would help the company to decide about the pricing for these services using different type of approaches ( for e.g. Cost recovery approach or Cost-plus strategy). The basis of allocation of various indirect overheads(indirect serv ice overheads and administrative overheads have been determined while calculating per unit of the three services provided by the company.
Description of approach used to allocate the costs
The costs of the three services provided by the company are calculated charging the direct material costs as per the actual for all these services. The direct labour cost(Software developers and client service representatives) has been charged on basis of tracking using time tracking software. The indirect service overheads and indirect administration overheads (For e.g. Salary of supervisor of software development, Outsourced development cost , Depreciation of the equipment, Generic software licenses cost , Utility cost , Marketing and travel expense and Office expenses) have been allocated in proportion of indirect labour hours worked by senior executives for each of the three services. The cost per unit of output of all these three services calculated by dividing the total of direct costs charged to the services and indirect overheads allocated to the services by the number of units of each of the services( Number of software licenses for Software development, Number of new clients for professional services and number of special projects for Special projects)
Summary of the Findings
The amount of the direct costs attributable to Software development, Professional services and Special projects are $ 232,000 , $ 180,000 & $ 60,500 respectively. The amount of indirect service overheads allocated to Software development are $ 87,952, allocated to professional services are $ 5,163 and allocated to Special projects are $ 10,383. The amount of indirect administrative overheads allocated to Software development, Professional services and Special projects are $ 331,766, $ 137,148 & $ 5,086 respectively. The indirect service overhead per labour hour is derived as $ 9.92 per labour hour and and indirect administration overhead rate is derived as $ 27.54 per hour.
The cost per unit of output of Software development is $ 543.1, of professional services is $ 191,230 and for Special projects is $ 15,194.
It is recommended that company should introduce a standard costing system. An effective and efficient standard costing system would result in better cost control, would provide more useful information for managerial planning and decision making. Standard costs can be used for setting selling prices.
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