Potential Sources of Error in Direct Costing

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Potential Sources of Error in Direct Costing When budgeting for the future as well as estimating costs for production of goods in the present there is a need to assess the prices of the direct inputs. The direct costs are those which are directly incurred as a result of production and can be completely attributed to that production. These costs will include materials, labor and other expenses such as power. The process of costing may appear simple; to calculate the direct costs and then allocate the indirect costs. However, while the concept may appear simple, the practice can be difficult with a number of potential sources of error which may lead to wrong assessments. The first potential error is a simple pricing error. This may include calculating the cost of direct materials based at today's price for future purchase when the price is not guaranteed. Even where there has been a history of stable prices, there will increase at some point. For forecasting direct costs there is a need to assess the future costs, the further ahead the forecast the greater the chance for a price change. Most cost forecasts will make an allowance for inflation. However, inflation is difficult to predict; economists that specialize in assessing economic performance find this problematic, so it is unlikely a firm will be able to assess this accurately (Cao et al, 2012). There is an additional complication; inflation will not be felt uniformly across all sectors of the economy, even if a

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