Direct Cost And An Indirect Cost Essay

Direct Cost And An Indirect Cost Essay

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A production department is the piece of the organization that produces goods and services that are in turn sold to the outside market for consumption. Service departments back up the production department by providing services to the production department. For example, in an organization that manufactures custom furniture, the production department might be responsible for cutting and assembling raw materials thus creating pieces of furniture. The service department would include maintenance professionals who repair and equipment used in the manufacturing process as well as office staff, human resources and other support departments within the organization.
2. Distinguish between a direct cost and an indirect cost.
An indirect cost is one that is incurred by the entire organization and whose use cannot be traced back to any specific department. For example, in a company that manufactures furniture, a direct cost might be a new woodworking machine that will allow the production department to manufacture more chairs per day. In other words, the cost of the woodworking equipment can be directly attributed to the production department. This is in contrast to an indirect cost within the furniture company such as a new fitness center that is being made available to all employees. In this case is virtually impossible to assign the cost of the fitness center to any one department in particular.
Costs that are usually charged as direct costs:
• project staff
• consultants
• project supplies
• project related travel
Costs that are typically charged as indirect costs:
• utilities
• rent
• accounting and legal services
• human resources and administrative staff
3. Give the steps in the cost allocation process.
The first step in the cost allo...


... middle of paper ...


...nt can use this information to decide which departments may need to be sold or closed as well as determining which departments might need to be expanded.
7. Name some of the costs and benefits of cost allocation.
The costs of cost allocation include:
• The need to hire additional personnel to assist in the allocation process.
• The need for additional management resources to help determine which methods of allocation will be used.
• Losses incurred by the organization as a result of incorrect information used in the cost allocation process.
The benefits of cost allocation include:
• Creating a sense of responsibility among management personnel and various units of the organization.
• It allows upper management to determine the profitability of each business unit. This helps them to determine which managers should be rewarded and which managers should be reprimanded.

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