Page 108 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 5: Basic Cost Concepts

The period costs are reported as expenses in the accounting period in which they Notes
1. best match with revenues,
2. when they expire, or
3. in the current accounting period.
In addition to the selling and general administrative expenses, most interest expense is a period
expense.

Direct vs Indirect Costs

Direct costs are those costs that can be traced to specific segments of operations.
Direct cost of the product can be classified into three major categories.
1. Direct Material: Direct material which is especially used as a major ingredient for the
production of a product.

Example:
(a) The wood is a basic raw material for the wooden furniture. The cost of the wood
procured for the furniture is known direct material cost.
(b) The cotton is a basic raw material for the production of yarn. The cost of procuring
the cotton is known as direct material for the manufacturing of yarn.
2. Direct Labour: Direct labour is the cost of the labour which is directly involved in the
production of either a product or service.

Example: The cost of an employee who is mainly working for the production of a
product/service at the centre, known as direct labour cost.

3. Direct Expenses: Direct expenses which are incurred by the firm with the production of
either a product or service. The excise duty and octroi duty are known as direct expenses
in connection with the production of articles and so on.
Indirect costs are those costs that can not be identified with particular segments.
1. Indirect Material: The material which is spent cannot be measured for a product is known
as indirect material.

Example: The thread which is used for tailoring the shirt cannot be measured or quantified
in specific length as well as ascertained the cost.
2. Indirect Labour: Indirect labour is the cost of the labour incurred by the firm other than
the direct labour cannot be apportioned.

Example: Cost of supervisor, cost of the inspectors and so on.
3. Indirect Expenses: Indirect expenses are the expenses other than that of the direct expenses
in the production of a product. The expenses which are not directly part of the production
process of a product or service known as indirect expenses.

Example: Rent of the factory, salesmen salary and so on.
Common costs are shared by multiple segments.

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