File Name: difference between direct and indirect cost .zip
Running a business is not easy. With the economy on a downward spiral, it has become even more challenging to make ends meet. Every penny spent needs to be turned over twice before it is paid out.
Direct cost is the cost incurred by the organization while performing their core business activity and can be attributed directly in the production cost like raw material cost, wages paid to factory staff etc, whereas, Indirect cost is the cost that cannot be directly attributed to the production as these costs are incurred in general and can be fixed or variable in nature like the office expenses, salary paid to administration, etc. If we look at the cost sheet, we will see that two types of costs stand out. The first is the direct cost, and the next is an indirect cost.
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Department of Education. Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs. In theory, costs like heat, light, accounting and personnel might be charged directly if little meters could record minutes in a cross-cutting manner. Practical difficulties preclude such an approach. Therefore, cost allocation plans or indirect cost rates are used to distribute those costs to benefiting revenue sources. Looking at it another way, indirect costs are those costs that are not classified as direct.
The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects. A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities which are considered period costs. The concept is critical when determining the cost of a specific product or activity, since direct costs are always used to compile the cost of something, while indirect costs may not be assigned to such a cost analysis. It can be too difficult to derive a cost-effective methodology for the assignment of indirect costs; the result is that many of these costs are considered part of corporate overhead or production overhead , which will exist even if a specific product is not created or an activity does not occur. Direct costs tend to be variable costs , while indirect costs are more likely to be either fixed costs or period costs. Examples of direct costs are direct labor , direct materials , commissions , piece rate wages , and manufacturing supplies.
The basic differences between direct cost and indirect cost are given as under: Conversely, Indirect Cost benefits multiple product or projects. The total of all the direct cost results in prime cost whereas the result of all the indirect cost is known as overheads. Direct Cost is traceable while Indirect Cost is not.
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The identification, measurement, and allocation of costs can help to determine the actual profit of the organization. Based on the relationship or degree of traceability to products, the costs are classified into direct costs and indirect costs. The two cost differ in the sense that expenditure which can be identified and allocated to a particular cost object or cost center, i. On the other hand, all the costs which are not tied to a particular cost center or cost object, i.
Businesses incur costs while generating revenue. If we look at the cost sheet of the company, we will see that total cost is a combination of direct cost vs indirect cost. These costs are very important for running any kind of business.
Every sponsored project has both Direct and Indirect Costs. The direct costs are those that can be specifically and easily identified with a particular project or activity and are allowable under the sponsoring organizations guidelines. Indirect costs, according to the federal Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards issued by the Office of Management and Budget Uniform Guidance , are those costs that are incurred for common or joint objectives, and cannot be easily and specifically identified with a particular sponsored project, an instructional activity, or any institutional activity. These indirect costs are different than direct costs. University indirect costs include building and equipment depreciation and use allowance; general administration; departmental, sponsored program, and sponsored project administration expenses; interest; operation and maintenance expenses; library expenses; and student administration and services expense. Most federal agencies and other sponsoring organizations pay the university for indirect costs in addition to the direct costs of a grant or contract award. Thus, indirect costs are the related costs of using the University's facilities and administrative support that cannot be claimed as direct costs.
Product and service reviews are conducted independently by our editorial team, but we sometimes make money when you click on links. Learn more. As the owner of a startup or small business, there are crucial aspects you should understand to put your business on the path to success. One of those aspects is understanding the distinction between direct and indirect costs when pricing your products or services. When you know the true costs involved with producing and providing your goods or services to consumers, you can price both competitively and accurately.
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