In a general engineering works the following routine has been followed for several years to arrive at an estimate of the price for a contract.

The process of estimating is started by referring to a job cost card for some previous similar job and evaluating the actual material and direct labour hours used on that job at current prices and rates.

Production overheads are calculated and applied as a percentage of direct wages. The percentage is derived from figures appearing in the accounts of the previous year, using the total production overhead cost divided by the total direct wages cost.

One-third is added to the total production overhead cost to cover administrative charges and profit.

You have been asked to draft a short report to management outlining, with reasons, the changes which you consider desirable in order to improve the process of estimating a price for a contract.