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Finance For Managers - Module 3 - Discussion

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David Luko Chifwalo
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21 views2 pages

Finance For Managers - Module 3 - Discussion

Uploaded by

David Luko Chifwalo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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A Direct cost is any cost that is directly attributable to a product or service (Kenton, 2020).

They

vary with volume of production and are therefore considered to be a variable cost (Kenton,

2020). Direct costs are easily traceable as per cost object (Kenton, 2020). The total of all direct

costs is known as the Prime Cost). The direct costs useful for short-term decisions but can lead to

adverse results if used for long-term decision making, because it does not include all costs that

may apply to long-term decisions (Accountingtools, 2019). Examples of direct costs include

labour cost, raw material cost, transportation cost, sales commission etc.

An Indirect cost is any cost that is not easily attributable to particular a project or service

(Kenton, 2020). They do not vary significantly with production volume and the majority are

considered as fixed costs. Indirect costs are costs used by multiple activities as they cannot be

assigned to specific cost objects (Kenton, 2020). The total of all the indirect costs is called

overhead. Indirect costs are useful for short-term as well as long-term decision making

(Accountingtools, 2019). Examples of Indirect costs include rent, administrative expenses, office

and accounting expenses etc.

Overhead allocation is the apportionment of indirect costs to produced goods (Accountingtools,

2019). A company uses the overhead rate to allocate its indirect costs of production to products

or projects (Accountingtools, 2019). Companies with low indirect costs will have a lower

overhead rate, which makes it more competitive than the other firms (Accountingtools, 2019)

The Return on Assets (ROA) is measured by dividing income by the total average assets. It

measures managements efficiency in using its assets to create a profit and is essential for
evaluating management performance. Both direct and indirect costs are deducted from revenue

to arrive at the Net Income which is used in the calculation of ROA.

Reference

Direct Cost . (2022, March 11). Investopedia. Retrieved April 6, 2022, from

https://www.investopedia.com/terms/d/directcost.asp

Bragg, S. (2022, 15 maart). Overhead allocation definition. AccountingTools. Geraadpleegd op

6 april 2022, van https://www.accountingtools.com/articles/2017/5/14/overhead-allocation

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