Cost Classifications for Assigning Costs to Cost Objects (Direct and
Indirect Cost):
Learning Objective of
this article:
- Define and explain direct and indirect
cost. Give examples of direct and indirect costs.
- What is the difference between
direct and indirect cost.
Definition of Cost Object?
Costs are assigned to objects for a variety of purposes including pricing,
profitability studies, and control of spending. A
cost object is any thing for
which cost data are desired including products, product lines, customers, jobs,
and organizational subunits. For the purpose of assigning costs to cost objects,
costs are classified as direct cost and
indirect cost.
Definition and explanation
of direct cost:
A direct cost is a cost that can be easily and conveniently traced to the
particular cost object under consideration. A cost object is any thing for which
cost data is required including products, customers jobs and organizational
subunits. For example, if a company is assigning costs to its various regional
and national sales offices, then the salary of the sales manager in its Tokyo
office would be a direct cost of that office.
Definition and explanation
of indirect cost:
An indirect cost is a cost that cannot be easily and conveniently traced to
the particular cost object under consideration. For example a soup factory may
produce dozens of verities of canned soups. The factory manager's salary would
be an indirect cost of a particular verity such as chicken noodle soup. The
reason is that the factory manager's salary is not caused by any one variety of
soup. To be traced to a cost object such as a particular product, the cost
must be caused by the cost object. This salary of manger is called
common cost of producing the various
products of the factory. A
common cost is a cost that is incurred to support a
number of costing objects but cannot be traced to them individually. A common
cost is a particular type of indirect cost.
A particular cost may be direct or indirect,
depending on the
cost object. While, in the above example, the soup factory
manager's salary is an indirect cost of manufacturing chicken noodle soup, it is
a direct cost of the manufacturing division. In the first case, the cost object
is the chicken noodle soup product. In the second case, the
cost object is the
entire manufacturing division.
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