Managerial Accounting
A Note on Direct Costs
Garrison et al.[1] define direct cost as a cost that can be easily and conveniently traced to a specific cost object. They go on to say that the concept of direct cost extends beyond just direct materials and direct labor. This is a reasonably accurate definition but I think you need a little more information to help you understand how to use this concept. There are certain features of direct costs that I would like to explain with this note.
In the problems in Chapter 2, it is generally assumed that direct costs are physically traceable and that they relate only to production costs. In other words, they are direct with respect to the product. When we talk about direct costs we need to be clear about what we mean by the cost object. In most examples in this course we will be considering the final product as the cost object. However, the cost object can be a department, a project, a family of products, or a channel of distribution. We might want to ask the question, “What does it cost to use ‘brick and mortar’ retail outlets as compared with ‘online’ sales distribution.?” Here the cost object relates specifically to the activities involved in selling a given product, not producing it.
When we talk about traceability, we are referring to the ability to attribute a cost with a final objective. In other words, we identify a cause-and-effect relationship. This relationship may be physical or it may be logical. Direct materials and direct labor represent examples of costs that are physically traceable because they are either physically incorporated into the final product or there is a necessary physical interaction required in order to produce the final product. However, there may be costs that are required to produce the final product that are not physically traceable. For example, order entry costs, production scheduling costs, quality control costs, distribution costs, etc. For these costs we can say that there is a
Garrison et al.[1] define direct cost as a cost that can be easily and conveniently traced to a specific cost object. They go on to say that the concept of direct cost extends beyond just direct materials and direct labor. This is a reasonably accurate definition but I think you need a little more information to help you understand how to use this concept. There are certain features of direct costs that I would like to explain with this note.
In the problems in Chapter 2, it is generally assumed that direct costs are physically traceable and that they relate only to production costs. In other words, they are direct with respect to the product. When we talk about direct costs we need to be clear about what we mean by the cost object. In most examples in this course we will be considering the final product as the cost object. However, the cost object can be a department, a project, a family of products, or a channel of distribution. We might want to ask the question, “What does it cost to use ‘brick and mortar’ retail outlets as compared with ‘online’ sales distribution.?” Here the cost object relates specifically to the activities involved in selling a given product, not producing it.
When we talk about traceability, we are referring to the ability to attribute a cost with a final objective. In other words, we identify a cause-and-effect relationship. This relationship may be physical or it may be logical. Direct materials and direct labor represent examples of costs that are physically traceable because they are either physically incorporated into the final product or there is a necessary physical interaction required in order to produce the final product. However, there may be costs that are required to produce the final product that are not physically traceable. For example, order entry costs, production scheduling costs, quality control costs, distribution costs, etc. For these costs we can say that there is a