? How to classify direct and in direct costs
There are several factors which affect the classification, which are:
The materiality of the cost
The smaller the amount of the cost is, the more immaterial the cost is and therefore the immateriality of the cost make it possible to trace this cost to a specific product as a direct cost
Design of operations
A cost could be directly traced to a specific product, if the company is using a specific facility to produce the product
For example, if the company has specific chemicals & using a specific machine for producing diet drinks without sugar
The cost of these chemicals and the machine is a direct cost should be traced to the product (diet drinks)
Available information – gathering technology
The development in information – gathering technology opened the way for more costs as direct costs
For example, bar codes helps in considering a lot of immaterial costs or low cost items such as clips & screws as direct costs instead of being in direct costs by reading these barcodes in the manufacturing process
Hint
A specific cost can be direct / in direct cost but it depends on the cost object
A one cost can be a direct cost for a certain cost object and at the same time an in direct cost for another cost object
For example,
A factory of cookies
The salary of the supervisor of the packaging department is a direct cost if the cost object is the packaging department and at the same time the same cost could be an in direct cost if the cost object is the product it self
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