The practice of relying solely on a supplier's direct labor as the basis for allocating indirect costs may be questionable in many cases, as suppliers continue to automate their production systems. In this article, regression analysis is presented as a technique for evaluating the appropriateness of the indirect cost allocation mechanism used by suppliers. Detailed information about a supplier's production activities is used to systematically evaluate the indirect cost drivers, allocation rates, and their appropriateness. This analytical tool can also be used to provide information for the construction of a new indirect cost allocation mechanism for counterproposals.
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