Direct and Indirect Costs By Cindy Walker. Outline Definition of direct and indirect costs Benefits...
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Transcript of Direct and Indirect Costs By Cindy Walker. Outline Definition of direct and indirect costs Benefits...
![Page 1: Direct and Indirect Costs By Cindy Walker. Outline Definition of direct and indirect costs Benefits of differentiating costs Explanation of the two costs.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649d965503460f94a7fa5c/html5/thumbnails/1.jpg)
Direct and Indirect CostsBy Cindy Walker
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Outline• Definition of direct and indirect costs• Benefits of differentiating costs• Explanation of the two costs• How to find the costs• Real world example• Exercise• Summary• Suggested readings
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What are direct and indirect costs?
• Direct costs are costs that can easily be traced to a specific project or activity.
• Indirect costs are costs that can not be easily traced to a specific project or activity.
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Benefits of differentiating costs• More accurate forecasting• Reduced overspending• Understanding trade-offs• Learning the true cost of projects/activities• Pricing
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Let’s practice!Determine if the following are direct or indirect costs:
1. Assembly line worker2. Manager of a paper company3. Electricity 4. Alarm sales rep5. Chef for a gourmet dinner6. Office space7. Microscope for a chemist8. Postage for a FedEx package
Direct
Indirect
Indirect
Direct
Indirect
Indirect
Direct
Direct
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Common direct costs
• Project materials • Project staff
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Common indirect costs
• Office supplies• Utilities• Rent• Administrative staff
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What to remember
• When identifying an activity, service, or product as a direct or indirect cost, it is important to remain consistent.
• Example: If labor is considered a direct cost for one project, it must continue being considered a direct cost.
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Finding the direct cost
1. Is the cost incurred from a certain project or activity?
2. Can I easily trace the cost to a specific project or activity?
3. Will the cost disappear once the project or activity is finished?
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Finding the indirect cost
1. Case-by-case allocation
2. Indirect cost rate
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Case-by-case allocation
• Find the actual usage of the indirect cost in question
• Disadvantage: DIFFICULT!!
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Indirect cost rateFormula:
Total Indirect Costs
Indirect Cost Rate
Total Direct Costs
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Indirect cost rate (cont.)• To find the indirect costs for Project A:
Project A’s Indirect Project A’sDirect Costs Cost Rate Indirect Costs
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Real world example
• Company XYZ has costs totaling $15,000. If Function A has direct costs of $7,000 and Function B has direct costs of $4,000, what are the indirect costs of Function A and Function B?
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Real world example (cont.)
• $4,000/$11,000 = 0.3636 or 36.36%
• Function A: $7,000*0.3636 = $2,545.20 indirect costs
• Function B: $4,000*0.3636 = $1,454.40 indirect costs
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Exercise
• Project A has direct costs of $400, Project B has direct costs of $500, and Project C has direct costs of $900. If all of these projects combined has a total cost of $3,000, what is the amount of indirect costs for Project B?
Project B’s Indirect Costs: $333.35
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Summary
• Direct costs relate specifically to a project while indirect costs relate on a broader scale.
• Consistently identify an activity as either a direct or indirect cost.
• Distinguish the type of cost through three questions. • Solve for indirect costs through case-by-case
allocation or an indirect cost rate.
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Suggested readings• Gordon, L. A. and M. P. Loeb. 2001. Distinguishing
between direct and indirect costs is crucial for internet companies. Management Accounting Quarterly (Summer): 12-17.
• Accounting for Dummies by John Tracy• SBIR Basics: The Numbers (Accounting, Costs,
Rates, Audits, and More) by Lea Strickland• http://www.umdnj.edu/rimweb/rim_cfp/indexcfp.htm