Question

Explain at least one practical value of classifying an organization's total costs into direct and indirect costs.

Answer 1

As we know that direct costs are those costs which can be easily identifiable with related cost objects whereas indirect costs are those costs which can not be easily identifiable with their related cost objects.

Main value or motive of this classification is to make a better cost monitoring and cost control system. Apart from this classification of costs also helps in managerial decision making because we know that some crucial decisions are taken only on the basis of direct costs so we have to know actual direct costs and indirect costs. Thus it becomes necessary to classify total costs between direct and indirect costs.

A firm and corporation produce various types products and services and utility of these all products & services can not be same for the end users hence prices of these products & services also can not be same but prices are fixed on the basis of associated costs hence it becomes necessary to classify total costs between direct and indirect.