Direct Cost:
A price that can be completely attributed to the production of specific goods or services. Direct costs refer to materials, labor and expenses related to the production of a product. Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product, and therefore are considered indirect costs.
For example, the cost of meat in a hamburger can be attributed directly to the cost of manufacturing that product, as could the cost of packaging materials and preservatives. These are considered variable costs that are inconsistent and change amounts often. An indirect cost, such as the hamburger manufacturer's legal fees and staffing, is anything that is not a direct cost.
Direct costs generally include:
Salaries are wages (including vacations, holidays, sick leave, and other excused absences of employees working specifically on objectives of a grant or contract – i.e, direct labor costs).
Other employee fringe benefits allocable on direct labor employees.
Consultant services contracted to accomplish specific grant/contract objectives.
Travel of (direct labor) employees.
Materials, supplies and equipment purchased directly for use on a specific grant or contract.
Communication costs such as long distance telephone calls or telegrams identifiable with a specific award or activity.
Hello,
I'm having trouble understanding Direct Cost, Overhead Cost and Indirect Cost. ***Also Period cost and Product cost.
please can anyone explain it and give examples for each! thanks
5 answers
Overhead Cost:
Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service.
Thus, overhead costs do not directly lead to the generation of profits. Overhead is still necessary, since it provides critical support for the generation of profit-making activities. For example, a high-end clothier must pay a substantial amount for rent (a type of overhead) in order to be located in an adequate facility for the sale of clothes. The clothier must pay overhead to create the proper sale environment for its customers.
Examples of overhead are:
Accounting and legal expenses
Administrative salaries
Depreciation
Insurance
Rent
Taxes
Utilities
The other type of expense is direct costs, which are those costs required to create products and services, such as direct materials and direct labor. Overhead and direct costs, when combined, equal all of the expenses incurred by a company.
Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service.
Thus, overhead costs do not directly lead to the generation of profits. Overhead is still necessary, since it provides critical support for the generation of profit-making activities. For example, a high-end clothier must pay a substantial amount for rent (a type of overhead) in order to be located in an adequate facility for the sale of clothes. The clothier must pay overhead to create the proper sale environment for its customers.
Examples of overhead are:
Accounting and legal expenses
Administrative salaries
Depreciation
Insurance
Rent
Taxes
Utilities
The other type of expense is direct costs, which are those costs required to create products and services, such as direct materials and direct labor. Overhead and direct costs, when combined, equal all of the expenses incurred by a company.
Indirect Cost:
An expense (such as for advertising, computing, maintenance, security, supervision) incurred in joint usage and, therefore, difficult to assign to or identify with a specific cost object or cost center (department, function, program). Indirect costs are usually constant for a wide range of output, and are grouped under fixed costs.
Indirect costs are those costs that are not classified as direct. Examples of indirect costs are :
Salaries of administrative and clerical staff providing normal support activities in the department, college or school
Office supplies including postage
Local telephone calls
Memberships
An expense (such as for advertising, computing, maintenance, security, supervision) incurred in joint usage and, therefore, difficult to assign to or identify with a specific cost object or cost center (department, function, program). Indirect costs are usually constant for a wide range of output, and are grouped under fixed costs.
Indirect costs are those costs that are not classified as direct. Examples of indirect costs are :
Salaries of administrative and clerical staff providing normal support activities in the department, college or school
Office supplies including postage
Local telephone calls
Memberships
Product Costs
For financial accounting purposes, product costs include all the costs that are involved in acquiring or making product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Product costs are viewed as “attaching” to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. So initially, product costs are assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released from inventory as expense (typically called Cost of Goods Sold) and matched against sales revenue. Since product costs are initially assigned to inventories, they are also known as inventoriable costs. The purpose is to emphasize that product costs are not necessarily treated as expense in the period in which they are incurred. Rather, as explained above, they are treated as expenses in the period in which the related products are sold. This means that a product cost such as direct materials or direct labor might be incurred during one period but not treated as an expense until a following period when the completed product is sold.
Period Costs
Period costs are all the costs that are not included in product costs. These costs are expensed on the income statement in the period in which they are incurred, using the usual rules of accrual accounting that we learn in financial accounting. Period costs are not included as part of the cost of either purchased or manufactured goods. Sales commissions and office rent are good examples of period costs. Both items are expensed on the income statement in the period in which they are incurred. Thus they are said to be period costs. Other examples of period costs are selling and administrative expenses.
For financial accounting purposes, product costs include all the costs that are involved in acquiring or making product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Product costs are viewed as “attaching” to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. So initially, product costs are assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released from inventory as expense (typically called Cost of Goods Sold) and matched against sales revenue. Since product costs are initially assigned to inventories, they are also known as inventoriable costs. The purpose is to emphasize that product costs are not necessarily treated as expense in the period in which they are incurred. Rather, as explained above, they are treated as expenses in the period in which the related products are sold. This means that a product cost such as direct materials or direct labor might be incurred during one period but not treated as an expense until a following period when the completed product is sold.
Period Costs
Period costs are all the costs that are not included in product costs. These costs are expensed on the income statement in the period in which they are incurred, using the usual rules of accrual accounting that we learn in financial accounting. Period costs are not included as part of the cost of either purchased or manufactured goods. Sales commissions and office rent are good examples of period costs. Both items are expensed on the income statement in the period in which they are incurred. Thus they are said to be period costs. Other examples of period costs are selling and administrative expenses.
At the end of the current year, $19,900 of fees have been earned but not billed to clients.
a. What is the adjustment to record the accrued fees? Indicate each account affected, whether the account is increased or decreased, and the amount of the increase or decrease.
b. If the cash basis rather than the accrual basis had been used, would an adjustment have been necessary? Explain.
a. What is the adjustment to record the accrued fees? Indicate each account affected, whether the account is increased or decreased, and the amount of the increase or decrease.
b. If the cash basis rather than the accrual basis had been used, would an adjustment have been necessary? Explain.