Direct Cost And Indirect Cost

1. Direct cost

Definition

It is an expense that can draw director to a specific cost object or cost center like department, product or process.

Direct cost varies with the rate of output but they are uniform with each production unit and are under control and with the responsibility of the department manager. Most cost are fixed in short run and flexible in long run so they are also called direct expense on the cost variable.

2. Indirect Cost

Indirect cost is any cost not directly recognized with a single final cost objective but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to conduct as a direct cost. After direct costs have been strong-minded and charged directly to the contract or to other work, indirect costs are those remaining to be allocated to the several cost objectives. Indirect cost shall not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective.

In simple terms, indirect costs are those costs not willingly identified with a specific organizational activity or project but experienced for the joint benefit of both projects and other doings. Indirect costs are usually grouped into common pools and charged to promoting objectives through an allocation process or indirect cost rate.

An indirect cost rate is just a device for defining justly and expeditiously the proportion of general expenses that each project will tolerate. It is the ratio between the total indirect costs of an applicant and some equitable direct cost base.

Indirect Costs Ratio

Indirect Cost Pool

Direct Cost Base = Indirect Cost Rate

Indirect costs include costs wh...

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...inear way with the number of units produced.

Product-level costs:

Costs are frequently fixed and direct with detail to a given product. A sample is the salary of a product manager with duty for only one product. Product manager’s salary is a fixed cost to the company for a wide range of production volume levels. If the company drops the product completely, the product manager is no longer wanted.

Facility-level costs:

Costs are usually fixed and direct with respect to the capability. Example is the salaries of front office personnel such as the receptionist and office manager.

One and only reason why ABC provides more correct product cost information is that old-style costing systems frequently allocate all overhead, including batch-level, product-level, and facility-level overhead, using an allocation base that is appropriate only for unit-level costs.