COST ANALYSIS 2

COST ANALYSIS 2

Cost analysis allows organizations to identify and classify cost drivers in the production process, therefore giving the organization an opportunity to control cost. Every organization seeks to reduce the cost of production to maximize the profit realized. To effectively reduce the production cost the organization must reduce the expenses directly linked to production. Direct costs are variable costs which vary with the production levels of the organization. An increase in production levels leads to an increase in these direct costs while a decrease, on the other hand, leads to a reduced cost of production. VecorCal’s drone navigation system is aimed at ensuring the developed drones operate effectively by developing a platform which will facilitate their functionality (Alzaman, Zhang, & Diabat,2018). Heavy investment is required from the two companies to cover the cost of development of the system. These costs can be classified as either direct or indirect cost and discussed below.

Direct costs

The main direct costs involved in drone navigation development are; material cost and labor costs. Labor costs are the costs involved in the acquisition and payment of labor used during the development process. The process requires the use of skilled labor to facilitate the creation of the system. These experts are expensive to hire due to their technical skills. These experts may include the software developers- for developing the software used in the navigation system. Another component of direct cost is the material cost. These are costs associated with the acquisition, storage and management of the raw materials used in the drone navigation development (Kaplan, & Atkinson, 2015). The system development will require many materials from different suppliers to ensure that it’s undertaken successfully. The cost of sourcing these materials, their transportation to the firms, their maintenance all increase the material cost of system development.

Comparison between direct and indirect costs of system development.

In addition to the direct costs, there are some fixed costs which the organizations have to undergo in the process of system development. These indirect costs are fixed and not easily controlled within the development process. They include the operational overheads such as water bills, rent required for the premise, electricity bills among others. These costs indirectly affect the development of the drones. These cost, however, are difficult to control unlike the direct costs, this is because these fixed costs will be undergone despite whether the organizations are operating or not. Both the direct and indirect costs, however, affect the overall navigation system development cost and therefore when these costs are low total cost will be low. Direct costs can be easily controlled by the organizations. Labor cost, for instance, can be reduced by reducing the number of experts involved in the development process. Material cost can also be reduced by ensuring that no extra materials are held in the organization and thus reducing the cost held in on inventory. Effective control of direct costs will gradually reduce the cost of drone navigation system development. Controlling the total cost of production will help extend the profit margins for these two companies.

Comparison between the two companies

IdealTech is a newly established company its acquisition price, therefore, is considerably low in comparison to VectorCal drone navigation. VectorCal drone navigation has much value as compared to the newly developed company; this is because it has operated for some time thus earning some goodwill. The semi-variable costs of these two companies, however, will not be affected by production (Haiderali, Menditto, Good, Teitelbaum, & Wegner 2011). However, there will be cost-sharing between the companies thus reducing the operational cost for both companies.

References

Alzaman, C., Zhang, Z. H., & Diabat, A. (2018). Supply Chain Network Design with Direct and Indirect Production Costs: Hybrid Gradient and Local Search Based Heuristics. International Journal of Production Economics.

Haiderali, A., Menditto, L., Good, M., Teitelbaum, A., & Wegner, J. (2011). Impact on daily functioning and indirect/direct costs associated with chemotherapy-induced nausea and vomiting (CINV) in a US population. Supportive Care in Cancer, 19(6), 843-851.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.