Understanding the costs needed to manufacture a product or provide a service is indispensable for any organization or company. Given the specificity of Universal Drones, Inc.’s and VectorCal’s business, a significant amount of costs is spent on materials and research and development required to produce drone navigation systems. Costs associated with the product’s materials include purchased parts, subcontracted items, raw materials, and standard items, for instance. In addition to material cost, Universal Drones, Inc.’s and Vector Cal’s manufacturing costs also include labor of those workers who are engaged in various steps of drones assembling. In Universal Drones, Inc.’s case, workers occupied with external gear and programming, workers on assembly lines, and those who contribute to the manufacturing are part of direct labor cost. General administrative expenses such as office supplies, rent, and equipment for administrative workers seemingly constitute a smaller part of expenses in drone production, especially compared to research and development and materials.
Direct labor cost refers to a portion of a salary paid to workers who participate in the manufacturing and assembly of parts to create a finished product, such as workers on the motor assembly line. Indirect labor cost applies to administration, human resources, financial, customer relation departments, et cetera (Hansen & Mowen, 2015). In the companies’ case, it encompasses the salaries of those employees who do not participate immediately in drone production, supervisors, and administrative staff, for example. Therefore, indirect manufacturing costs are expenses that cannot be traced explicitly to the final price of a drone. In contrast, direct manufacturing costs are associated with the necessary materials and labor to produce it (Hansen & Mowen, 2015). Research and development costs are predominantly direct expenditures to advance and modernize the product overall or technologies and materials needed to produce drones in particular. On the other hand, general and administrative expenses are identified as mainly indirect since they do not contribute immediately to the drone production processes.
An array of methods helping a company allocate costs exists; nevertheless, a specific method should be selected depending on a business’s peculiarities. For example, units of production method help determine depreciation by calculating factors such as production capacity, output, and usage (Hansen & Mowen, 2015). As suggested by its name, the machine hour method establishes depreciation hourly, where it depends on the number of working hours. Unlike the previous one, the direct labor hour method considers working hours of those involved in manufacturing and not material assets. Lastly, the direct labor cost method is based on calculating overhead expenses.
The direct labor cost method is suitable for Universal Drones, Inc., and VectorCal for several reasons. The method is usually applied in companies where direct labor costs form a considerable part of a product’s final price. In the case of drones, companies seem to rely significantly on research and development direct labor to implement innovations and provide updated products. Considering manufacturing specificities, the machine hour method could meet the needs of Universal Drones, Inc. and VectorCal, as it centers around expenses needed to ensure the assembly process, which could be the crux in drone navigation systems production. The direct labor hour method is also suitable where work as an element of production constitutes a major expenditure. Nonetheless, it has an array of limitations – this method is based primarily on labor, whereas manufacturing costs Universal Drones, Inc. and VectorCal extend considerably beyond it. Conclusively, the companies would use cost allocation methods that encompass most fully their needs and concentrate on predominant costs. Direct labor cost and machine hour methods seem to account for innovativeness and automation of the business.
Hansen, D. R., & Mowen, M. M. (2017). Cornerstones of Cost Management. Cengage Learning.