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Direct and Indirect Costs

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Introduction

Element 6.3 Task 2 Page 1 Direct costs An organisation can apportion the costs incurred in the production of products or services in either a direct or an indirect manner. The direct costs can be defined as being the amount materials actually cost plus any other directly linked costs, such as labour. (for Quirk, materials, electricity, labour employee and management, machine depreciation) Production materials, machine or assembly wages 1. Labour and wages - the cost of obtaining, training and retaining labour is a significantly high cost which must be allocated to each unit of production. There are many legal obligations as well as social and welfare considerations, which add to this high costs total. ...read more.

Middle

Unfortunately, things are not that simple. There are many other individual costs which an organisation must bear in the employment of individuals. These may include employer's national insurance contributions, pension payments and insurance policy payments. In most organisations, labour and wage costs account for the majority of direct costs. 2. Materials - the costs of materials differ according to the sector in which an organisation operates. As organisation that operates in the primary sector has comparatively low material costs. At the other end of the scale, in the tertiary sector, the costs of finished goods to a retailer for example, will be extremely high. ...read more.

Conclusion

Indirect costs (for Quirk, rent/rates, sales/ marketing/ insurance/ non-production depreciation management salaries) Indirect costs are costs incurred in the running of an organisation that cannot be easily apportioned to the production process. In effect, they cover all of the support and management services of the organisation. These indirect costs may be apportioned in percentage terms to each unit produced. However, the optimum balance between direct and indirect costs can be somewhat difficult to ascertain. If an organisation allows its indirect costs to rise in a disproportionate manner to its direct costs and production levels, then we can consider the organisation to be rather 'top heavy'. It will suffer loss of both profit and working capital. The main forms of indirect cost are: > Other wages > Depreciation > Management > Administration > Marketing > General running expenses ...read more.

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