Question

Compare direct costs to indirect costs. Give an example of a cost at a company that could be a direct cost at one level of the organization but would be considered an indirect cost at a different level of that organization. Explain why this same cost could be both direct and indirect (at different levels).

Answer 1

Direct costs are the expenses which can be directly linked to a cost object. A product, service, department etc. Can be a cost object. Raw materials cost, labour cost etc. are the examples of direct cost.

Indirect costs are used by multiple activities and it cannot assigned to a particular cost object. Indirect cost can either fixed or variable. Salary of supervisor,electricity charges etc are the examples of Indirect cost.

A cost can both direct cost and indirect cost at different levels of organization. For example an organization manufacturing different types of soaps, in which jasmin flavoured soap is having very high demand than others soaps . So company appointed a supervisor alone for jasmin flavoured soap. Here supervisor salary is direct expense hence it directly related to to a particular cost object (jasmine flavoured soap). Company appointed another supervisor for remaining all other product. This supervisors salary is an indirect expense, hence it is not directly linked to a particular cost object

Another example. A soap manufacturing company selling there various products in New Jersey only. So they appointed one supervisor for all variants of soaps that they manufacturered. This supervisor salary is indirect cost since it is not directly linked to a particular cost object. Later they expanded there market to all-over the America. At that time company appointed seperate supervisor for each variant of soap. Here supervisor salary is direct cost since it can directly linked to cost object.