treatment of indirect costs

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Expert Solution

There are two types of cost

1. Direct cost - Cost that is directly associated with production or profit genration .

2. Indirect cost - Cost that is not directly related to production or profit genration but is incidental to production .

Treatment

Direct cost is directly associated with production so it could be directly recognised but indirect cost is incidental so it cannot be directly attributable thus it must be distributed on some resonable basis .

Take an example a business is engaged in manufacturing wooden tables , the material that is wood and labor expenses, direct cost , could be directly calculated for each table manufactured table but indirect cost like electricity , rent , supervisor salary etc cant be directly calculated for each table manufactured thus these expenses must be attributable on some resonable basis among all tables manufactured like number of total tables manufactured or some other basis which business seems fit .

ekkarill92 answered 1 year ago

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