Direct and Indirect Costs
Direct costs
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An organisation can apportion 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 labour.
(for Quirk, materials, electricity, labour employee and management,
machine depreciation)
Production materials, machine or assembly wages
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1. Labour and wages – the cost of obtaining, training and retaining
labour 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 labour and wages costs to be attributed
to each unit of production, an organisation must take a careful study
of the production process and allocate the appropriate expenses. If,
for example, an individual earns £10 per hour and processes 10 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 organisation must bear
in the employment of individuals. These may include employer’s
national insurance contributions, pension payments and insurance
policy payments. In most organisations, labour and wage costs account
for the majority of direct costs.
2. Materials – the costs of materials differ according to the sector
in which an organisation operates. As organisation that operates in
the primary sector has comparatively low material costs. At the other
end of the scale, in the tertiary sector, 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
organisation's overall budgetary controls. In addition, an
organisation must also consider the cost of materials in relation to
market demands, as these will inevitably cause periodic fluctuations
in material costs.
Only those materials that are actually used in the production of a
product or service should be considered part of the cost of that
product or service.
Task 2 Page 2
Other consumables used by the organisation are classed as indirect
costs and are considered under separate budgets.
Indirect costs
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(for Quirk, rent/rates, sales/ marketing/ insurance/ non-production
depreciation management salaries)
Indirect costs are costs incurred in the running of an organisation
that cannot be easily apportioned to the production process.
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One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988).
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
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=[ (10,000 x 24) + ( 5,000 x 20 ) + ( 8,000 x 16 )] – 1,220,000
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The factors considered in determining the team leadership (chief spokesperson) were that the individual had to be one that had was very good in speaking in front of a classroom. This person has to be motivated to have a strong strategy to bargain our demands for the union. The chief spokesperson must be prepared to negotiate our teams proposal to improve the union with our demands. As we start to negotiate, we would need a leader that will be able to work with the opposing team to create an agreement. As both teams start the debating process the chief spokesperson must be able to be flexible and communicate with our team on what we think about the terms at hand. The chief spokesperson that we found would be perfect for our team was Michael Mamathy. He has an outgoing personality and a strong speaker that would help our team have a successful debate. The vice chief spokesperson is Joshua Bontumasi because of the communication skills that he has when it comes to group assignments. Communication is a strong part of the role of chief spokesperson because they must be able to keep the team in the loop and make sure that we all agree to the terms of
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