Question

Differentiate between a direct cost and an indirect cost of a segment. What happens to these categories if the segment to which they are related is eliminated?

Answer 1

A direct cost of a segment are the costs which are directly recognised with the production segment. These costs are proportional to each segment unit. These costs are used to compile the total costs of a product segment. For example, direct materials, direct labor , manufacturing supplies, commissions, etc.

The indirect cost of a segment are those costs which are not confined to a cost but are essential to be incurred on the production segment. These costs are not recognised to account cost of a product. These costs are a part of production overhead. These costs exists even if a particular production segment is closed down. For example supervisor salaries, quality control costs, insurance expense, and depreciation expense.

If the segment, to which the direct and indirect cost are related, is eliminated, then there would not be any direct costs because as it is directly proportional to the production, so no production, no direct costs. But the indirect costs are not got eliminated on the elimination of the segment, as these costs are common to all segment, so are also called corporate costs.