Direct Labor Variance Formulas
Direct Material Variance Formulas
Direct Cost vs. Indirect Cost
In accounting, a distinction is made between direct costs and indirect costs. Direct costs can be traced to a particular cost object. Indirect costs cannot be traced to a particular cost object. A cost object is something that can incur cost. For example, a cost object could be a company division, a product line, a unit of inventory, or even a decision.
The idea is to analyze business decisions by determining the incremental costs that would result from that decision. If a decision affecting a certain cost object determines whether or not the cost is incurred, it is a direct cost. If the cost is incurred regardless of the outcome of the decision at hand, it is an indirect cost. Examples of Direct and Indirect Costs
Examples of direct costs include the cost of raw materials to manufacture a product, or the cost of the wages of the factory workers that make the product. Examples of indirect costs include the rent and the utility expenses incurred by an office building that houses several different business areas of a company, or the salary of a manager that supervises more than one factory. Indirect Costs Become Direct Costs
A cost can be an indirect cost in regard to one cost object and a direct cost in regard to another object. For example, the salary of the manager who supervises multiple plants would be considered an indirect cost for any one of those plants. However, that manager’s salary would be a direct cost for the division encompassing all of those plants.