Please explain why indirect costs are allocated..
Please explain why indirect costs are allocated..
Homework Answers
Answer
--Indirect cost are those cost that are incurred, but are not directly related to the production of the product.
--However, for pricing issue and for various other cost management aspect, the 'cost' of the product needs to include these indirect cost.
--Unlike direct cost, indirect costs cannot be directly traced to a given product.
--For example, raw material (direct cost) used in the production of Product A can be traced to Product A and is direct cost. However, rent paid for the factory building where many products are produced cannot be traced to Product A is so factory building rent is an indirect cost.
--Therefore, in order to include the 'indirect' cost part into the 'cost of the product', these indirect costs are ALLOCATED to them. This allocation can be done by the use of predetermined allocation rates, Activity based costing, etc.
List four reasons why indirect costs are allocated.
List four reasons why indirect costs are allocated.
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