Sample Management Essays on Direct and Indirect Costs

Direct costs are defined as the expenses that a business succinctly connects to the production of a product, object, or completion of a project. It also includes costs incurred in purchasing software, equipment, and raw materials used to implement and produce a product or complete a project (Hammad et al., 2016). For example, expenses incurred in acquiring water, soil, and hiring labor to manufacture bricks are direct costs. Conversely, indirect costs are defined as the expenses incurred for multiple activities within an organization, and transcend the production of a particular product or object. Per Martin & Stevens (2011), indirect costs are overhead costs computed to indicate the actual expenses incurred to run a business. Examples of indirect costs include supervision salaries, insurance, quality control, cleaning services, office equipment, and rent. As much as these items contribute to the running of a business, they are directly unassigned to the creation of a product or service.

There are notable differences between the two cost concepts. Foremost, direct costs are expended on specific cost objects while indirect cost is spent on multiple cost objects. Consequently, Azad et al. (2016) label direct cost as a variable because the expenses vary based on objects, products, and services consumed or produced. Conversely, indirect costs are fixed because they do not change according to the units produced or consumed. Concerning computation on the cost sheet, direct costs are calculated at the beginning of a cost sheet while indirect costs are computed after the calculation of direct expenses (Rieckhof et al., 2015). Besides, in the cost sheet, direct costs are labeled as prime cost, while indirect expenses are described as overhead costs.

I believe that having a solid understanding of costs and expenses is a requirement for business managers to help them understand how to price products and services. I suppose that business executives need to know cost allocation and distribution to find out the profit generated per unit object sold. Managing the costs of operating a business is a significant component utilized by companies to gain a competitive advantage.

 

References

Azad, R., Azad, R., Azad, K., & Akbari, F. (2016). The effect of cost accounting system inventory on increasing the profitability of products. Journal of Industrial and Intelligent Information, 4(1), 83-87.

Hammad, M., Abbasi, A. & Ryan, M. (2016). Allocation and management of cost contingency in projects. Journal of Management in Engineering, 32(6).

Martin, L. & Stevens, K. (2011). Investment in cost accounting systems: Decision criteria. Journal of Applied Business Research (JABR), 6(3), 19-25.

Rieckhof, R., Bergmann, A. & Guenther, E. (2015). Interrelating material flow cost accounting with management control systems to introduce resource efficiency into strategy. Journal of Cleaner Production, 108, 1262-1278.