Direct Cost vs Indirect Cost
In accounting, there is a distinction between direct cost vs indirect cost. You can trace direct costs to a particular cost object. However, you cannot trace indirect costs to a particular cost object. A cost object is something that can incur cost. For example, a cost object could be a company division, a product line, a unit of inventory, or even a decision.
The idea is to analyze business decisions by determining the incremental costs that would result from that decision. If a decision affecting a certain cost object determines whether the cost is incurred, then it is a direct cost. If the cost is incurred regardless of the outcome of the decision at hand, it is an indirect cost.
Examples of Direct and Indirect Costs
Examples of direct costs includes the following:
- The cost of raw materials to manufacture a product
- The cost of the wages of the factory workers that make the product
- The rent and the utility expenses incurred by an office building that houses several different business areas of a company
- The salary of a manager that supervises more than one factory
Indirect Costs Become Direct Costs
A cost can be an indirect cost in regard to one cost object and a direct cost in regard to another object. For example, consider the salary of the manager who supervises multiple plants an indirect cost for any one of those plants. But, also consider the manager’s salary a direct cost for the division encompassing all of those plants.
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