Wage Rate Analysis - Case Study Example

Factory overheads can be defined as related expenditure that the company might have to incur when it undertake the above mentioned engineering contract. Examples of factory overhead would be depreciation of the machinery and equipment, rent of the space in which the facilities of the company is housed, utilities expenses such as electricity consumption expense pertaining to the operation of machinery etc. Now these factories overhead can further be divided into two classes same as the wage rate, which are fixed overhead and variable overhead.

From the aforementioned list, the variable overhead expense would be the electricity consumption which is specifically dependent upon the running time of the machine. Electricity overhead expenditure would be greater if the machinery is utilized for a longer duration in the contract and vice versa. In addition, other variable overhead expenditure such as depreciation and rent are fixed expenditure in nature. This can be explained by considering the fact that whether the company accepts the contract or not depreciation would be recorded in the books of the company on account of normal wear and tear of the machinery.

Similarly, whether the company utilized its resources on the contract it has to pay the rent of the site in which the facilities are houses. The expenditure of this sort is fixed in the short term and is not dependent upon the outcome of activity. Thus while quoting the price to the government; the contractor must carefully consider the above mentioned aspects into consideration and then quote a relevant per hour price. The contract price calculation per hour must include all relevant variable factory overhead.

It must be ensured that only those variable overheads which are directly related to the project and is dependent on the outcome of the project, such overheads which are variable and not related to the outcome of the project must not be included in the project. Fixed factory overheads must not be included in the per hour contract price as they will be expended whether the contract was accepted or not. 2. For further clarity, the wage rate should be broken down into fixed and variable parts. The fixed part of any cost is that which is not dependent upon the level of output and does not change even if the output increases or decreases.

The variable part of any cost is entirely dependent upon the level of output. Exercise 2 Category Wage Rate Percentage of Contractual Effort Total Hour Spent Total Wage Expense Scientist 25 10% 800 20,000 Senior Engineer 23 15% 1,200 27,600 Engineer Assistant 14 5% 400 5,600 Trainee 7 70% 5,600 39,200 Total 8,000 92,400 Per Hour Wage 11.55 The use of weighted average wage rate is quite appropriate in the circumstances. The contract comprises of various category of engineering experts ranging from the scientist to the trainee.

Each category of the engineering expert charges a different wage per hour as compared to the other based on their experience. The scientist, being the most knowledgeable and experienced charges $25 per hour whereas the trainee charges a mere $7 which shows the range of wage rate per hour. On the other hand, if we analyze the time spent on the contract