Costs can be classified as direct costs or indirect costs. The intent behind this classification is to assign costs in order to cost objects. Expense object means virtually any thing about which cost information will be collected. Some samples of cost objects tend to be products, departments, buyers, plant, a property, a product collection and research as well as development activities from the business etc.
Quick explanation of direct costs and indirect costs pick up below:
A cost that’s easily traceable into a particular cost object is referred to as direct costs. The application of the term “direct costs” isn’t limited to direct materials and direct labor. Every cost that could be easily and conveniently traced into a particular product, client, branch, plant or some other cost object is often a direct cost. For instance, if HashPapies shoes company wants to assign costs to all or any the branches in India, then the salary of the manager of Delhi branch has to be direct costs of their branch.
A cost that is not easily traceable into a particular cost object is called indirect costs. One example is, a clothing manufacturer produces different varieties of cloths. The salary in the manager would be an indirect cost as it is caused by all of the varieties and isn’t easily traceable into a particular variety. The Rafhan Maize Goods company produces numerous products by digesting tones of corn each year. The salary in the factory manager is surely an indirect cost with the products because it is not caused by a certain product.
The costs that are the effect of a number of price tag objects but cannot be traced to a certain cost object is termed common cost. For examples, the salaries in the managers of clothes factory and Rafhan maize products are standard costs.
When we say direct or indirect cost, we mean that it is direct or indirect with respect to a particular cost object. A cost may be direct for one cost object but indirect for another. For example, National Food Products Co. has a number of branches in Pakistan. Each branch sell a variety of food products. The salary of the manager of Karachi branch would be an indirect cost of a particular product but direct cost of the branch as a whole.