Price analysis is defined as the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit (Murphy, 2009). The best price analysis that fits in the chosen rationale is comparison of prior proposed price and contract prices with current proposed for the same or similar items. The comparison to prior prices paid method is one of the most frequently used price analysis technique by government agencies (Murphy, 2009). This type of price analysis is useful when the agency has had a history of contracting for the same products or services.
When contracting a government agency must consider pricing history and current lowest bid prices for particular products and services. Murphy (2009) says that “government must forecast the price of those products and services in its budget and convince the reviewing authorities that the forecast is reasonable” (p. 33). Another major characteristic of government contracting that affects pricing is based on the fact that the bids, price proposals, and quotes received by the government in response to solicitations and requests for quotations must all be evaluated for price reasonableness. As a result, Murphy (2009) says that the government is required to point out apparent or obvious mistakes to offerors if it has reasonable basis to suspect they are present.
Governments are likely to get fair and reasonable pricing when they purchase relatively large quantities. Similarly, the government is likely to pay more per unit if the quantity decreases. In addition, special design items peculiar to government use with no commercial counterpart may well produce significant pricing problems for the government (Murphy, 2009). When the government orders in small quantities, the unit prices are often out of line with what common sense would indicate the parts are worth. It should however be noted that government price estimates may not be very reliable in other cases. However Murphy (2009) argues that one of the problems is that people attempting the estimate, no matter how conscientious, they may lack the complete and up-to-date data that must be available for reasonably accurate estimating”.
In the process of forecasting the likely price of an acquisition, a government agency first forecasts the price of those products and services in its budget and convinces the reviewing authority that the forecast is reasonable (Murphy, 2009). The agency uses price analysis methods for the forecast, whether it thinks of it in those terms or not. When the funds are appropriated, the agency is in a position to actually buy the products and services. This requirement implies that someone has to develop the expected price for a product or service. The estimate is likely to be done by comparing with generally know costs for similar products or services.
When calculating semi-variable costs, the expenses stand in the midway between fixed and variable expenses and have an element of variations. Gupta, Sharma & Ahuja (2010) noted that when the variable cost part is more in the total semi cost these are known as semi-variable while in the case the fixed cost part is more than variable cost in the total semi-cost then these are known as semi-fixed cost. During the calculation process, the semi-variable cost remains fixed to a certain level. Slight changes in output beyond this level increase the overheads to the next level.
Direct costs include only the variable costs, those costs that vary directly with the quantity produced. During the process of allocating direct cost, the variable costs costs should be attributed to a particular production unit (Nicosia & Moore, 2006). On the other hand indirect costs cannot be allocated to a particular production unit because these costs do not vary directly with each unit. According to Murphy (2009), indirect costs are recorded as incurred and accumulated in homogenous cost pools. Each of the indirect cost pools are then billed to the different jobs in harmony with the company’s cost allocation plan.