You're preparing to enter into negotiations. Your supplier has provided some costing details and the numbers look legitimate at first glance. But your end cost is still too high. As you reflect on the supplier's detailed quotation, do you understand the section dealing with overheads or fixed expenses? Traditional cost accounting methods advocate assigning these costs as a percentage of direct materials or direct labor. So, depending on the allocation method your supplier uses, you may wind up subsidizing an operation or process that has no direct tie-in to your particular purchase. You can, however, make your supplier rethink this allocation.
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