Question

Discussion 04.2: Indirect and Direct Cost

Use your household as a pretend organization.

List each family member as a cost object within your pretend family organization.

For your household organization, list all expenses and cost during a 3-month period.

For each of your monthly costs, list whether it is a direct or indirect cost based on its association with a cost object (family member).   

Answer 1

Direct costs are costs which can be directly attributed to the production of goods. It varies as per the production varies. It is directly proportional to the production of goods. For example, direct materials, direct labour, commissions etc.

Indirect costs are those costs which are not directly proportional to the production of goods. It does not varies as the production varies. These are fixed costs whether you produce goods or not. For example, rent, office expenses, administrative salaries etc.

We are a family of 3 people. (Father, mother and son)

Father - Manufacturing department

Mother - Admin department

Son - Sales department

Following are the costs associated with each of the above department for 3 months period:-

Father - Manufacturing department

Direct Labour - Direct costs

Direct Materials - Direct costs

Electricity Expenses - Direct costs

Depreciation on manufacturing equipments - Indirect costs

Factory rent - Indirect costs

Mother - Admin department

Admin Salaries - Indirect costs

Office rent - Indirect costs

Office electricity expenses - Indirect costs

Insurance - Indirect costs

Office supplies - Direct costs (to be used only if office is open)

Subscriptions - Direct costs (to be taken only if the office is open)

Son - Sales department

Salaries of sales officers - Indirect expenses

Commissions - Direct expenses

Sales office rent - Indirect expenses

Petrol allowance, daily allowance to sales officers - Direct expenses (to be given only if they work)