Direct and Indirect Cost with Managerial Accounting

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Direct, Indirect

July 23, 2012

Direct, Indirect 1 A company can allocate the costs incurred in the production of products or services in either a direct or an indirect manner. The direct costs can be defined as being the amount materials actually cost plus any other directly linked costs, such as labor, materials, electricity, labor for employee and management, machine depreciation) Production materials, machine or assembly wages. Labor and wages – the cost of obtaining, training and retaining labor is a significantly high cost which must be allocated to each unit of production. There are many legal obligations as well as social and welfare considerations, which add to this high costs total. In order to work out the exact labor and wages costs to be allocated to each unit of production, a company must take a careful study of the production process and allocate the appropriate expenses. If, for example, an individual earns $20 per hour and processes 20 units during that hour, then $1 of direct costs may simply be added to each unit. Unfortunately, things are not that simple. There are many other individual costs which an organization must take in the employment of individuals. These may include employer’s insurance contributions, pension payments and insurance policy payments. In most organizations, labor and wage costs account for the majority of direct costs. Materials – the costs of materials vary according to the way in which a company operates. A company that operates in the primary sector has comparatively low material costs. At the other end of the scale, the costs of finished goods to a retailer for example, will be extremely high. The principal elements that affect the costs of materials should be included in the company’s overall budget controls. In addition, a company must also consider the cost of materials to market the demands for products, these will definitely cause periodic ups and downs...
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