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Chapter 16: 10RQ (page 885)

Explain the difference between a direct cost and an indirect cost.

Short Answer

Expert verified

The direct cost is effectively traced but the indirect cost cannot be traced easily to a cost object.

Step by step solution

01

Definition of cost

The cost is defined as the expenditure required which is to create and sell products and services or to buy some assets.

02

Difference between a direct cost and an indirect cost

Direct cost refers to the cost which can be easily and cost-effectively traced to a cost object. But on the other hand, the indirect cost is the cost that cannot be easily or cost-effectively traced to a cost object.

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Most popular questions from this chapter

Making ethical decisions

Sue Peters is the controller at Vroom, a car dealership. Dale Miller recently has been hired as the bookkeeper. Dale wanted to attend a class in Excel spreadsheets, so Sue temporarily took over Dale鈥檚 duties, including overseeing a fund used for gas purchases before test drives. Sue found a shortage in the fund and confronted Dale when he returned to work. Dale admitted that he occasionally uses the fund to pay for his own gas. Sue estimated the shortage at $450.

Requirements 2. Would you change your answer if Sue Peters was the one recently hired as controller and Dale Miller was a well-liked, long time employee who indicated he always eventually repaid the fund?

Question:Classifying period costs and product costs

Lawlor, Inc. is the manufacturer of lawn care equipment. The company incurs the following costs while manufacturing weed trimmers:

鈥� Shaft and handle of weed trimmer

鈥� Motor of weed trimmer

鈥� Factory labor for workers assembling weed trimmers

鈥� Nylon thread used by the weed trimmer (not traced to the product)

鈥� Glue to hold the housing together

鈥� Plant janitorial wages

鈥� Depreciation on factory equipment

鈥� Rent on plant

鈥� Sales commissions

鈥� Administrative salaries

鈥� Plant utilities

鈥� Shipping costs to deliver finished weed trimmers to customers

Requirements

1. Describe the difference between period costs and product costs.

2. Classify Lawlor鈥檚 costs as period costs or product costs. If the costs are product costs, further classify them as direct materials, direct labor, or manufacturing overhead.

How does a service company calculate unit cost per service?

List the four IMA standards of ethical practice, and briefly describe each.

How does a manufacturing company calculate unit product cost?
See all solutions

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