Management Accounting

1030 words | 4 page(s)

Examples of Direct Costs in a Business
Directs costs are costs incurred by businesses that could be directly attached to units of products or services put to the market. These costs include expenses on material and labor among others that are necessary for a business to develop products or services that satisfy the needs of its customers (Clarke, 2011 p.4). Other costs incurred by a business cannot be directly attached to specific quantity of goods or services offered by the business and are called indirect costs. These costs affect the entire organization as a single unit and not to various products. These include the administrative expenses, depreciation costs and accounting costs that are affect all functions of the business. There are difficulties experienced in separating direct and indirect costs that would overlap in various situations. For instance, according to Carey, Knowles, & Owers-clark (2011, p.12), some direct costs would be converted to indirect costs to minimize their implications on the business productivity. This paper will explain four examples of direct costs while giving real life examples.

Direct Labor Costs
Businesses require employees to convert raw materials into finished or saleable products. For service businesses, they would require workers offer various categories of services to clients. The kinds of employees involved are engaged in direct activities of manufacturing products or rendering services and have direct influence in the level of output of the business (Drury, 2007, p.10). These employees form direct labor force to the business the expenses incurred in compensating them are direct costs. These include salaries for operators of machines and equipment used in processing raw materials to final products. Other direct labor costs include salaries, bonuses, uniforms, insurance expenses as well as training for direct employees. In a service business such as the hospital, the health officers such as consultants, nurses and doctors that offer care to patients constitute direct costs. According to Mclaney, & Atrill (2010, p.2), direct labor cost have direct effect on price of products and profitability of the business. Employees whose activities cannot be directly attached to certain products constitute indirect labor costs and include supervisors and administrators. Direct labor cost may be converted to indirect labor cost (Duska, Duska, & Ragatz, 2011, p.22). For instance, when driver of ferrying materials to the factory is assigned responsibility to drive business managers ceases to be part of direct costs.

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Direct Process Costs
There are costs incurred throughout production presses that form part of direct costs of a business. The processes are systems used by the workers to convert raw materials into final products or services. Businesses incur huge finances to buy or establish these systems and such costs have impact on the price of products. In addition, these assets could be clearly attached to specific levels of output when they run. The appliances are necessary to design output so as to meet requirements of customers and when they do not run, production targets are not attained (Lal, & Srivastava, 2009, p.6). Nevertheless, depreciation and the costs incurred in maintaining the processing systems could be clearly attached to given set of products and therefore do not make part of direct costs. Other process costs include the expenses incurred on outsourced companies that help in transforming raw materials to final products. An example is payments to malting companies that prepare malt ready for brewing purposes in large brewing companies. The payments to sub-contracted company are based on quantity of malt supplies and level of production. The expenses form part of direct costs that could be clearly attributed to processing activities (Haller, Raffournier, & Walton, 2003, p.16). The services of the subcontractor do not help in the direct processes, for instance, subcontractors offering food and restaurant services to direct process workers. The expenses involved would be regarded as indirect cost.

Power Expenses for Production Machines
Electricity expenses are a direct cost to production where costs objective are based on clear lines of production. Machines and equipment used in production consume huge amounts of power that has direct impact on the cost of production (Warren, Reeve, & Duchac, 2012, p.19). Some businesses have also installed own power engines to run the production machines using petroleum or other forms of power. The production equipment is also fitted with meters to keep track on the power consumed in giving various levels of output. The costs associated with levels of power can be directly linked to given levels of output units and therefore make up direct costs. Where there are no separate power circuits for production and other uses in a business, it would not be possible to attribute power usage to final output and hence the expenses involved are indirect costs.

Training Expenses on Direct Laborers
Most businesses have invested significant amount of money in key employees involved in direct production activities. These include training of operators such as on operations of modern equipment as well as on product design to improve the quality of products (Megginson, & Smart, 2009, p.10). Trainings for the workers direct laborers could be attached with given level of production especially where there is emphasis to obtain total direct costs of production. Trained employees would lead to higher production levels of goods and services. The marginal increase in production would be directly linked to the costs incurred in training and hence form part of direct cost. According to Riahi-Belkaoui (2003, p.4), if the workers are offered trainings in management, the costs involved are indirect since cannot be clearly attributed to specific products.

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