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.
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In order to work out the exact labour and wages costs to be attributed to each unit of production, an organisation must take a careful study of the production process and allocate the appropriate expenses. If, for example, an individual earns £10 per hour and processes 10 units during that hour, then £1 of direct costs may simply be added to each unit. 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 ...

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