Direct and Indirect Costs
Direct costs
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An organisation can apportion the costs incurred in the production of
products or services in either a direct or an indirect manner. The
direct costs can be defined as being the amount materials actually
cost plus any other directly linked costs, such as labour.
(for Quirk, materials, electricity, labour employee and management,
machine depreciation)
Production materials, machine or assembly wages
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1. Labour and wages – the cost of obtaining, training and retaining
labour is a significantly high cost which must be allocated to each
unit of production. There are many legal obligations as well as social
and welfare considerations, which add to this high costs total.
In order to work out the exact labour and wages costs to be attributed
to each unit of production, an organisation must take a careful study
of the production process and allocate the appropriate expenses. If,
for example, an individual earns £10 per hour and processes 10 units
during that hour, then £1 of direct costs may simply be added to each
unit. Unfortunately, things are not that simple.
There are many other individual costs which an organisation must bear
in the employment of individuals. These may include employer’s
national insurance contributions, pension payments and insurance
policy payments. In most organisations, labour and wage costs account
for the majority of direct costs.
2. Materials – the costs of materials differ according to the sector
in which an organisation operates. As organisation that operates in
the primary sector has comparatively low material costs. At the other
end of the scale, in the tertiary sector, the costs of finished goods
to a retailer for example, will be extremely high. The principal
elements that affect the costs of materials should be included in the
organisation's overall budgetary controls. In addition, an
organisation must also consider the cost of materials in relation to
market demands, as these will inevitably cause periodic fluctuations
in material costs.
Only those materials that are actually used in the production of a
product or service should be considered part of the cost of that
product or service.
Task 2 Page 2
Other consumables used by the organisation are classed as indirect
costs and are considered under separate budgets.
Indirect costs
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(for Quirk, rent/rates, sales/ marketing/ insurance/ non-production
depreciation management salaries)
Indirect costs are costs incurred in the running of an organisation
that cannot be easily apportioned to the production process.
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
Direct fixed costs result from any resource in the practice that is specifically involved in the delivery of the service, but the cost that is not directly related with volume of service delivered. With the pharmacy division of CVS focusing on prescriptions, the most substantial direct fixed cost of dispensing a prescription is personnel cost, especially the cost of the pharmacist. This typically represents about 50% of the cost of dispensing a prescription. Since the pharmacy staff that is scheduled to work on a particular day, this causes the cost of the practice to remain the same regardless of whether an additional prescription is dispensed that day. Their wages and benefits are also considered fixed costs for the corporation.
Method of variable costing is a method where costing can be discovered including the variable manufacturing costs. Fixed factory visual projection is delighted as a period cost-it is abstracted along with the selling and administrative expenses in the period deserved. That is,
When discussing the essential difference between direct and indirect cost the main difference is that only direct cost can be easily traced to specific cost objects. Furthermore, direct cost are cost that can be easily traced to a cost object in a cost effective manner and with little effort. However, indirect cost cannot be easily traced to a cost object in a cost effective manner (Edmonds, Tsay, & Olds, 2011). Therefore, a cost object is something for which a cost is made up of such as a product or service.
According to the Delivering Health Care in America, cost shifting is a method used by insurance companies to balance inadequate payments, mostly to bridge the gap from low government reimbursement (Shi & Singh, 2015). Cost shifting is when private insurance companies charge people more to make up for the money they lose. Hospitals and other health care providers are able to compensated for the services they provide for uninsured patients by increasing payments to private insurance (Coughlin, Holahal, caswell& McGrath, 2014). Government programs such as, Medicare and Medicaid reimburse hospitals at a very low rate, according to Potter (2015) the only way hospitals can be able to keep providing care and make up for their looses
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
where operating expenditure includes the following cost items: materials, services, wage costs and other costs.
The second way is to achieve low direct and indirect operating costs is gained by offering high volumes of standard products and offering basic no-frills products. Production costs are kept low by using less parts and using standard components. Limiting the number of models produced to ensure larger producti...
The factors considered in determining the team leadership (chief spokesperson) were that the individual had to be one that had was very good in speaking in front of a classroom. This person has to be motivated to have a strong strategy to bargain our demands for the union. The chief spokesperson must be prepared to negotiate our teams proposal to improve the union with our demands. As we start to negotiate, we would need a leader that will be able to work with the opposing team to create an agreement. As both teams start the debating process the chief spokesperson must be able to be flexible and communicate with our team on what we think about the terms at hand. The chief spokesperson that we found would be perfect for our team was Michael Mamathy. He has an outgoing personality and a strong speaker that would help our team have a successful debate. The vice chief spokesperson is Joshua Bontumasi because of the communication skills that he has when it comes to group assignments. Communication is a strong part of the role of chief spokesperson because they must be able to keep the team in the loop and make sure that we all agree to the terms of
Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue.
Job costing involves usage of situations where every job is done cost differently, consumers specifications play a bigger picture in this case. Direct and indirect costs are encountered. It is believed that job costing has lots of costs accrued from the production to the consumers (REEVE, J. M., WARREN, C. S., & DUCHAC, J. E. 2012). This involves labor, running of machines, and all the individuals who are involved in the production of a product from raw to the final product, indirect costs are applied in this order. Job costing order is best showcased in a manufacturing company, let’s take coca cola company, company specialized in beverages manufacturing and distribution, usually customers have no say in the final products of this company, but as the trends for consumption of a certain flavor, according to their statistics they will conform with the demands. The special requirements, like name branding on the bottles of the beverages, customization of the containers have had a significant impact in the consumption of coca cola products (Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. 2010).
"Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods" (1) , Now we will discuss why ABC can result in more reliable products costs than conventional labor based product costing system . In recent years, the nature of industrial production has fundamentally altered; we will discuss their characteristics. First we have machine production and capital intensive, Now machines are the main tool and at the heart of production; labors maintain machines and supervise them, and machines are the ones that dictates the pace and rate of production. The second characteristic is high level of overheads relative to direct cost; in modern businesses they tend to use overheads in different ways for example: some products need engineering time and some products require machine time so that products will use overheads differently. The third characteristic is highly competitive international market, transportation including fast freight and relatively cheap; one of the advantages is the use of internet ensures that customers can easily and quickly reach and find products and also cheaply, this environment is highly competitive so companies need to know accurately their range of prices in order to use this information to gain competitive advantage over other
Total revenue, which is the total amount of income received from the sales of a certain quantity of goods or services. Total revenue can be calculated by multiplying the price of a product times the quantity sold. For instance, if 160 baseball caps are sold and each baseball cap was priced at $5 each, the total revenue would be (160*5) $180.
Of greater importance, job-order costing system needs to accumulate three types of information which include direct materials, direct labor, and overhead. These factors are highly important essentially because of the significant variations in the products produced. Hence, each product or batch has a job identification number and costs are accumulated by a job number. All the more, job-order costing systems requires detailed accounting information and thus the total cost of all jobs is accumulated in one work-in process inventory control account; details of the cost materials, labor, and overhead for each job are kept in subsidiary records called job-order cost sheets (Edmonds, Tsay, & Olds,