Overhead Costs and Rates in the U.S. Defense Industrial Base. Volume 1

Abstract

Abstract : This document investigates and analyzes the elements of overhead cost structures for major weapon systems. The investigation of overhead costs and rates was based on Department of Commerce data from 1961-1977 for 72 major U.S. industries as defined by their 4-digit SIC (Standard Industrial Classification) number. For the specific purpose of this analysis, 21 of the 72 industries were examined closely. These 21 industries make up a major part of the defense industrial base and include both the major weapon builders and their supplier industries. Based on the collected data, overhead costs were defined as all costs including profit other than direct labor and direct material costs incurred by a corporation in doing business. The overhead rate was defined as overhead costs divided by direct labor costs. Although overhead as it is defined in this report is a simplification of how overhead is determined within the corporate sector, the definitions of overhead rates and costs which are used are consistent with the concepts of variable and fixed costs as they are normally defined by economic theory. The purpose of this project was to establish analytical benchmarks and techniques for the military Program Manager rather than to establish rigidly defined cost accounting structures.