Direct and Indirect Costs :: Economics

Direct and In propose CostsDirect cost============An organisation can apportion the costs incurred in the production ofproducts or values in either a direct or an indirect manner. Thedirect costs can be defined as being the amount materials actuallycost plus any other directly linked costs, such as labour.(for Quirk, materials, electricity, labour employee and management, forge depreciation)Production materials, machine or assembly wages===============================================1. Labour and wages the cost of obtaining, training and retaininglabour is a significantly high cost which must be allocated to for each oneunit of production. There are many legal obligations as well as socialand welfare considerations, which add to this high costs total.In modulate to work out the exact labour and wages costs to be attributedto each unit of production, an organisation must take a careful leadof the production process and allocate the appropriate expenses. If,for example, an individ ual earns 10 per hour and processes 10 unitsduring that hour, then 1 of direct costs whitethorn simply be added to eachunit. Unfortunately, things are not that simple.There are many other individual costs which an organisation must bearin the employment of individuals. These may include employersnational insurance contributions, pension payments and insurancepolicy payments. In most organisations, labour and wage costs accountfor the majority of direct costs.2. Materials the costs of materials differ according to the sectorin which an organisation operates. As organisation that operates inthe primary sector has comparatively low material costs. At the otherend of the scale, in the tertiary sector, the costs of finished goodsto a retailer for example, exit be extremely high. The principalelements that affect the costs of materials should be included in theorganisations overall budgetary controls. In addition, anorganisation must also consider the cost of materials in relation tomar ket demands, as these will inevitably cause periodic fluctuationsin material costs.Only those materials that are actually used in the production of aproduct or service should be considered part of the cost of thatproduct or service.Task 2 Page 2Other consumables used by the organisation are classed as indirectcosts and are considered under separate budgets.Indirect costs ==================(for Quirk, rent/rates, sales/ marketing/ insurance/ non-productiondepreciation management salaries)Indirect costs are costs incurred in the running of an organisationthat cannot be easily apportioned to the production process.