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.
One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988).
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
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=[ (10,000 x 24) + ( 5,000 x 20 ) + ( 8,000 x 16 )] – 1,220,000
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.
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 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
where operating expenditure includes the following cost items: materials, services, wage costs and other costs.
These costs are as a result of the variable factor of production that depends on the levels of demand for the factors toward the success of the product. Total variable costs determine a lot on the levels of profits to be earned due to their variation from one position to another. The main variable cost is the value of labor required to maintain the production levels at a certain given time. As the labor increases their costs, it becomes much expensive for the production firm to maintain high levels of production (Bell, R and Ho). The firms, therefore, produce largely to ensure that they cope with the expenses incurred for the payment of the labor workers. However, a company can shift from one place to the production site to another to avoid the expenses associated with the labor supply for that particular country. Hence, this is what has made Chinese companies shift from China to the States of America. Therefore, the impact of total variable cost is an inverse relationship between the levels of profits earned. As the variable costs increases, the amount of profits earned may be deteriorating. Likewise, the profits may be at the maximum if the total variable costs are at the lowest levels of
When the company goes for in-house producing, the products must incur all the costs and expenses that are related to the products. On the other hand, if the company decided to go for the outsourcing the purchased product must include all the expenses up till the purchased products are received and stored. Multiple opinions are needed to compare either the qualitative analysis, but the quantities aspect is
Accounting is referred to as the process of recording, classifying and summarizing business transactions in terms of money, preparing financial reports as well as the interpretation of these reports. The business accounting system can be divided into three parts, financial accounting, cost accounting and management accounting. Cost accounting is an accounting information system that records, measures and reports information about costs which is used in decision making and performance evaluation. There are mainly two types of cost accounting, job order and process costing. The focus of this literature review is on process costing and its features.