Taking a Look at Production Finance

1259 Words Feb 3rd, 2018 5 Pages
Direct costs do not have to be allocated to a product, department, or other cost item. Direct costs include of direct labour, direct material and direct expenses.
For example, if a company produces furniture, the cost of the wood or fabric, the cost of the employee building the furniture and the patent for the design are direct costs. They are clearly visible to the production department and to each item produced.
Indirect costs are costs that are incurred by the company and cannot be traced to any one finished unit. These costs are often referred as overheads. The rent is an indirect cost, cost of the indirect material, indirect labour and indirect expenses. As an outcome indirect costs and expenses are often allocated to the department, product, etc. For example, a car manufacturing company has some costs that are directly linked to it, such as the wages and marginal benefits of the direct labour working solely in that department. The heat for the entire building is an indirect cost to the car manufacturing company. Generally it will be assigned to all departments based on the number of square feet each department occupies.
Prime cost is a way of measuring the total cost of the production inputs needed to create a given output. By evaluating its prime costs, a company can regulate how much it must charge for its completed product in order to make a profit. This may also be referred to as the total…

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