Adopting a Material and Subcontract Handling Rate - Types of Costs to Include in the Handling Pool
Things to consider when deciding what to include in the Handling Pool and the type of Base to use.
The type of business – manufacturing, research and development of prototype products, services – and type of direct costs that will have a handling fee applied will dictate which costs to include in the handling pool. The following is a sample of costs that have been adopted by firms at certain times. They are oriented to a manufacturing environment that intends to establish a material and subcontract handling fee. Other types of firms (e.g. professional services) will need to whittle down the list of possibilities to meet the nature of their handling costs.
The personnel in typical support functions are normally indirect and the following are indirect cost candidates to include in the handling pool: clerks, material handlers, receiving and shipping personnel, stockroom employees, tool-crib attendants, janitors, maintenance men, packers and contract individuals. Individuals associated with the following tasks are also candidates for the handling pool – correcting nonconforming material, determining material and subcontract requirements, defect prevention efforts, engineering design costs, materials cost estimating, pricing of material, evaluation of compliance with policies and procedures, purchasing, contracting and subcontracting, storeroom and warehouse, small storerooms and tool cribs, inspection, quality control, storing and issuing, obsolete tool, rework, waste, spoilage, warranty expenses and indirect material.
All of these costs can be accumulated into cost centers where not only personnel related costs but all costs associated with those cost centers can be assigned to the handling pool such as fringe benefits, facilities costs, depreciation, etc.
In addition, portions of more general indirect functions may be allocated to the handling pools such as accounting, human resources, legal, engineering, research and development, finance and even portions of more senior management cost if a significant amount of efforts are related to the material/subcontract/other direct costs included in the handling base of costs. Timesheets for these individuals will be preferable. If timesheets are not practical, then other bases could be devised to assign a portion of these functional costs to the handling pool.
For example, human resources could be allocated to various indirect pools (including handling) on a headcount or personnel cost basis, accounting on vendor payments processed, engineering on number of engineering orders to ensure a reasonable allocation of their costs are assigned to the handling fee pool.
Lastly, a portion of other costs incurred by the company may be allocated to the handling pool on some reasonable basis. For example, if facilities costs (e.g. rent, depreciation, utilities, telephone, janitors) are assigned to individual cost centers that are, in turn, assigned to the handling pool, fine; if they are not or there is a significant amount of general facility costs not allocated to individual cost centers, then a surrogate basis (e.g. square footage utilized, headcount) can be used to allocate a portion to those costs to the handling pool.
Remember the method used to compute the amount of costs allocated to the handling pool need not be consistent with the method used for internal or financial accounting purposes but can be done on a separate “memo” basis for government contract costing purposes.