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Analyzing Direct Costs

In: Business and Management

Submitted By josephgoles
Words 968
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Costs fall into two categories: direct and indirect. Direct costs are those costs which can be attributed to a specific final cost objective(s); alternatively, indirect costs are those costs which have no specific cost objective.
An example of a direct cost might be the costs associated with salaries of "hands-on" personnel, e.g., engineers supporting a particular project. An indirect cost might be the office supplies those engineers use, the cost of rent on a facility in which everyone (not just the engineers) works, utilities, etc.
While the decision to treat a cost as indirect or direct may be difficult, it is important to treat such costs consistently in order that the costs are not "double-counted." In other words, if the salary of Sam, the engineer, is normally considered an indirect cost, it is calculated when the indirect costs are computed. If Sam suddenly charges work as a direct cost, I have counted Sam's salary twice, and am thus saddled with an overhead rate that may not be as competitive as if Sam were not included. Treatment of costs in a consistent manner is in consonance with commercial cost accounting as well as related government-unique accounting requirements

Analyzing Other Direct Costs (ODC)
One of the biggest challenges in analyzing other direct costs is ensuring that they have not been captured in another part of the total cost. As with labor and material costs, other direct costs are those costs that can be attributed to a specific cost objective(s) and are not previously identified as a direct material cost, direct labor cost, or indirect cost. Although these costs are normally charged as indirect, because the proposed contract requires a large, unusual, or one-time expenditures, it could be charged to a specific cost objective(s). Frequent other direct costs include: Special tooling and test equipment,…...

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