Statistical Modeling of Quarterly Contractor Overhead Costs,
NAVAL POSTGRADUATE SCHOOL MONTEREY CA
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Overhead costs generally are estimated by using estimated overhead rates which are then applied to estimated labor hours or costs in each of several functional categories, such as engineering or manufacturing. Total overhead is then obtained by summing across all the functions. This approach is not entirely satisfactory since changes in operating rates cause changes in overhead rates which are reflected only after a significant lag. For firms in which output fluctuates significantly, this approach can result in poor estimates of overhead costs with corresponding difficulties for product pricing. In instances where the Federal government is the sole purchaser of the product, actual production costs both direct and indirect are important inputs into the price and quantity negotiation process. With aerospace contractor overhead comprising 30 to 50 percent of total costs to the Federal government, it is imperative that overhead costs be estimated with greater accuracy. An alternative approach to estimating overhead costs is to estimate these costs directly and, hence forego direct reliance upon overhead rates. Two examples of this are provided. Martinson reclassified overhead costs from the usual functional categories into an input-oriented categorization and then regressed these new categories of overhead costs on various operating variables. Gross and Dienemann estimated various categories of overhead costs using direct labor and material costs on a pooled time-series, cross-section sample of aerospace firms.
- Administration and Management
- Economics and Cost Analysis
- Statistics and Probability