Understanding Direct and Indirect Costs in Business Accounting

The direct costs and indirect costs are a common type of costs incurred by each company. What does it include? Costs that are often incurred in business are usually measured in units of money. Everything in business can not be separated from the cost.

Cost is one of the most crucial and important elements in business. Matters related to costs must be recorded in the report to be accounted for.

For business owners you should be aware that tracking costs is an important part of the budgeting process. Some of you may not understand the difference between direct and indirect costs.

Not only can properly categorizing expenses affect a company’s cash flow, it can also have a significant impact on federal tax payments. Understanding and tracking direct and indirect costs is an important part of keeping your business in compliance. For more details on direct and indirect costs, see the explanation below.

Identifying Direct and Indirect Costs

 Knowing Direct and Indirect Costs in Business Accounting

Companies classify direct or indirect costs based on whether they are used to produce goods or services. Here’s the explanation.

1. Direct Cost

The direct costs is the cost associated with producing the goods and can be traced back to a specific object.

Usually, direct costs are under the control of the department manager and are constant for each unit of production.

The direct costs ( direct costs ) are costs that can be charged directly to cost objects or products.

Employee salaries are included in the direct costs of producing a product, and include the raw materials needed to produce certain goods.

In some contexts, direct costs include employee benefits and programs, equipment, travel, and consulting services.

The following is an explanation of several types of direct costs.

a. Material Cost

Material costs are costs that include the purchase of materials and materials calculated by unit price analysis.

Things that must be taken into account in material costs are leftover materials, loco or franco prices, best prices, and payment methods to suppliers.

b. Labor Wage Cost

The cost of labor wages is the payment of workers’ wages which is calculated against unit items and usually has a standard unit price.

In calculating the cost of workers’ wages, it is necessary to pay attention to things such as the difference between daily or wholesale, work capacity, where the workers come from, as well as taking into account the applicable labor laws.

c. Equipment Cost

The cost of equipment is the cost of equipment to carry out construction work.

To calculate this cost, several things need to be considered, such as; costs of entering and leaving the warehouse, operating labor costs, and operating costs if the equipment is rented, depreciation, repairs, maintenance, and mobilization costs if the equipment is not rented.

2. Indirect Cost

Usually direct costs are easy to determine, but indirect costs are often much easier. Indirect costs ( indirect costs ) are costs that can not be connected and charged directly to the unit produced.

Generally, indirect costs include electricity and utilities, distribution and sales, building maintenance, and other office-related costs.

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