Question

1.     Define direct cost:

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2 Give three examples of direct costs that would incur in a paper airplane manufacturing department (what costs can be easily traced to this specific department?)

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Answer 1

(A) DIRECT COS]T A Direct Cost is traceable to a specific item, such as a product. For example, the cost of the materials used to create a product is a direct cost. There are very few direct costs. The cost of any consumable supplies directly used to manufacture a product can be considered a direct cost. However, production labor is frequently not a direct cost, because employees usually are not sent home if there is one less incremental item being produced; instead, they are paid for the duration of theif work shifts, irrespective of the volume of production. Other costs that are not direct costs include rent, production salaries, maintenance costs, insurance, depreciation, interest, and all types of utilities. Thus, when in doubt, assume that a cost is an indirect cost, rather than a direct cost. For example, the materials used to produce an automobile are a direct cost, whereas the electrical cost of the metal stamping machine used to convert sheet metal into body panels for the automobile is not, because the machine must still be powered up throughout the working day, irrespective of any changes in production volume Direct cost analysis can also be used outside the production department. For example, subtract the direct cost of goods sold to individual customers from the revenues generated by them, which yields the amount customers are contributing toward the company's coverage of overhead costs and profit. Based on this information, management may decide that some customers are unprofitable, and should be dropped.

2. Examples of direct costs that would incur in a paper airplane manufacturing department

(a) Cost of wages of assembly worker

(b) cost of Materials used for airplace manufacturing

(c) Wages paid for the Labours