Question

Give two good examples of direct costs and two good examples of indirect costs. What is the ratio between the two? How can you use this concept as an engineering manager?

Answer 1

Direct costs:

1) Cost of material going into the product for manufacturing

2) Cost of labor involved in the manufacturing

Indirect costs:

1) Cost of Quality assurance, checks and controls

2) Salary of Supervisors who are overseeing the operations (Administrative costs)

I work for a Consumer goods company (Colgate) and we have ratio of 70:30 for Direct cost:Indirect cost. So, Direct cost is much higher than Indirect cost.

As an engineering manager, the direct and indirect cost concept is very important. The direct cost involved can be reduced by bringing automation in the process through advance machinery. It will support to reduce cost of direct labor and at the same time, product quality will improve and thus indirect cost of quality will go down. Also, cost of supervision will go down as machines can work for long time without supervision. The engineering manager can also work on improving product quality to reduce the cost of waste and rework. Thus, engineering manager's role is very critical in controlling overall cost.