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December 8, 2006

What are direct costs?

Direct costs can be traced directly to a cost object such as a product or a department. In other words, direct costs do not have to be allocated to a product, department, or other cost object.

For example, if a company produces artisan furniture, the cost of the wood and the cost of the craftsperson are direct costs—they are clearly traceable to the production department and to each item produced—no allocation was needed. On the other hand, the rent of the building that houses the production area, warehouse, and office is not a direct cost of either the production department or the items produced. The rent is an indirect cost—an indirect cost of operating the production department and an indirect cost of crafting the product.

To calculate the total cost of the production department or to calculate each product’s total cost, it is necessary to allocate some of the rent (and other indirect costs) to the department and to the product.

I associate indirect with allocation and arbitrary.

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Comments

21 Responses to “What are direct costs?”

  1. Tony on February 4th, 2008 2:58 pm

    Can you furnish me a chart of account of a title company. Thank you.

  2. emcie on March 12th, 2008 8:57 am

    your explantions helped me pass my exams and i really thank you.

  3. Thuli on August 27th, 2008 4:31 pm

    Hie,i would like to more about direct and indirect cost

  4. qamar on November 9th, 2008 12:19 pm

    i want to know about modified internal rate of return i shall be very thankful to you if u help me in this reguard

  5. kunwar jee on November 25th, 2008 11:19 pm

    sir, please give me the details to calculate the pro-rata allotment of issue of shares

  6. fellini on November 26th, 2008 7:16 am

    Please sir i will like to know more about direct expence,labour and materials as well thier indiret forms

  7. George on December 15th, 2008 11:04 am

    I own a small chain of supermarkets and I am continually remodelling a different store and am unclear if the freight charges I incur from the equipment manufacturers are to be included in the fixed asset value of the delivered equipment or not?

  8. poopoo on January 20th, 2009 6:42 am

    i think it is good

  9. kate on January 22nd, 2009 7:33 am

    direct cost are those cost that are directly tracable in prodution of a particular commodity oor product or department.i.e Royalities etc.good job u doing there Sir.

  10. jafar on February 4th, 2009 8:24 am

    please enligthen me about project accounting and the procedures…

    thak you…

  11. chicky on February 12th, 2009 10:09 am

    good work

  12. mohau on March 14th, 2009 3:53 am

    explain the indirect cost.

  13. raja zahid on April 11th, 2009 2:52 am

    Thanks for doing wonderful job for us.

  14. pk on May 15th, 2009 2:08 am

    sir could u plz tell me deffination of following terms and formula of these.

    1-production cost
    2-manufacturing cost
    3-ex- factory cost

  15. jj on July 21st, 2009 11:24 pm

    If for example you withdrawn from the company Bank account amount of 10,000 and was spent for petty cash. How do you record the transactions using TALLY

  16. rea on September 25th, 2009 10:34 am

    if the given account name in a statement is “production costs”. . am i right that it must be put onto manufacturing overhead account?. .

    . . tnx. .
    =]

  17. bigboles on October 12th, 2009 6:24 am

    please i want you to give me on the following :

    direct cost
    Indiect cost
    fixed cost
    Veriable cost
    Over Head cost

  18. Abigail on November 3rd, 2009 3:04 am

    Hi, can u please help me to explain more on the direct and indirect cost and please give a more concrete example please… thank u and God bless!

  19. Abigail on November 3rd, 2009 3:06 am

    can u also help me about cash budgetting… i find it hard… please do help me.. thank u so much!

  20. dude on November 6th, 2009 7:54 am

    Why would direct costs continue to be incurred even if a product is discontinued?

    This was a test answer…

  21. Bob on November 10th, 2009 9:48 pm

    Are direct costs normally deducted from net revenue before determining indirect cost allocations?

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