Direct costs
Costs that can be easily and conveniently traced to a unit of product or other cost object.
Examples: direct material and direct labor
Indirect costs
Costs that cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead
A cost object is anything for which cost data are desired including products, customers, jobs, organizational subunits, etc. For purposes of assigning costs to cost objects, costs are classified two ways:
Direct costs are costs that can be easily and conveniently traced to a specified cost object. Examples of direct costs are direct material and direct labor.
Indirect costs are costs that cannot be easily and conveniently traced to a specified cost object. An example of an indirect cost is manufacturing overhead. Common costs are indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.
Direct and Indirect Costs Examples – Hotel Business
Review Questions M/C
Review Questions M/C
The Northridge Store is just one of many stores owned and operated by the company. The Cosmetics Department is one of many departments at the Northridge Store. The central warehouse serves all of the company’s stores.
68. What is the total amount of the costs listed above that are direct costs of the Cosmetics Department? A. $74,000 B. $36,000 C. $31,000 D. $40,000
Review Questions M/C
D. $40,000
Review Questions M/C
Direct costs of the Cosmetics Department = Cosmetics Department sales commissions + Cosmetics Department cost of sales + Cosmetics Department manager’s salary = $5,000 + $31,000 + $4,000 = $40,000
Review Questions M/C
69. What is the total amount of the costs listed above that are NOT direct costs of the Northridge Store? A. $40,000 B. $34,000 C. $141,000 D. $78,000
Review Questions M/C
C. $141,000 Costs that are not direct costs of the Northridge Store = Corporate headquarters building lease + Corporate legal office salaries + Central warehouse lease cost = $78,000 + $57,000 + $6,000 = $141,000
Review Questions M/C
Review Questions M/C
The Brentwood Store is just one of many stores owned and operated by the company. The Shoe Department is one of many departments at the Brentwood Store. The central warehouse serves all of the company’s stores.
Review Questions M/C
70. What is the total amount of the costs listed above that are direct costs of the Shoe Department? A. $80,000 B. $88,000 C. $130,000 D. $92,000
Review Questions M/C
D. Direct costs of the Shoe Department = Shoe Department cost of sales + Shoe Department sales commissions + Shoe Department manager’s salary = $80,000 + $8,000 + $4,000 = $92,000
Review Questions M/C
71. What is the total amount of the costs listed above that are NOT direct costs of the Brentwood Store? A. $152,000 B. $92,000 C. $79,000 D. $38,000
Review Questions M/C
A-Costs that are not direct costs of the Brentwood Store = Corporate legal office salaries + Corporate headquarters building lease + Central warehouse lease cost A= $62,000 + $79,000 + $11,000 = $152,000
Learning Objective 7
Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
Learning objective number 7 is to understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
Every decision involves a choice between at least two alternatives.
Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored as irrelevant.
Cost Classifications for Decision Making
It is important to realize that every decision involves a choice between at least two alternatives. The goal of making decisions is to identify those costs that are either relevant or irrelevant to the decision. Costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits are irrelevant and can and should be ignored. To make decisions, it is essential to have a grasp on three concepts: differential costs, opportunity costs, and sunk costs.