Question

1)Generally speaking, what is the difference between direct cost and indirect cost? Assume you are a manager, which one would concern you more when you are analyzing the cost of your product/service? Why?

2)Traditionally, in a manufacturing company, what is the most popular way to treat indirect cost? What is the advantage and disadvantage of that?

Answer 1

1. The difference between the direct cost and indirect costs are as follows :-

1. Direct cost are which shows the their impact directly on the cost of product or services of the organization.

2. Indirect costs are which shows there impact indirectly on the cost of product or service of the organization.

3. Example for the direct cost is purchases of raw material

4. Example for the indirect cost is salaries to the employees

As a manager i concern about the indirect costs

1. With effective management we can minimize and control the indirect costs

2. We cannot control direct cost the only control to minimize the direct cost is to decrease the production

3. By using good and tactic techniques we can minimize the indirect costs like hiring few skilled employee than many unskilled employees.

2. Treatment to the indirect cost is apportioning the total indirect cost to all the products and services of the organization .

Advantages

1. This leads to minimize the total cost of production.

2. This leads to reduce the cost of selling expenses and marketing expenses.

3. By apportioning the expenses to all products the buyer cannot feel the pinch or burden of indirect cost.

Disadvantages

1. Sometimes the apportionments of indirect costs leads to that the burden of indirect costs is high compared to direct costs. This is not in all cases but in some exceptional cases example direct cost of chocolate(production cost ) is lesser compared to indirect cost (marketing costs and advertising costs) of chocolate.

These are all the explanation for the asked question.

I hope, all the above given explanation and examples are useful and helpful to you.

Thank you.