Direct Expenses

The third element of cost, after materials and labour, is direct or chargeable expenses. These are expenses which can be conveniently allocated directly to a cost unit. According to Chartered Institute of Management Accountants, London, direct expenses are costs other than material and wages which are incurred for a specific product or saleable services. Examples are:

(a) Cost of hiring special machinery or plant.

(b) Cost of special moulds, designs and patterns.

(c) Experimental costs and expenditure on model and pilot schemes.

(d) Fees paid to architects, surveyors and other consultants.

(e) Cost of transport and conveyance to the site of the job or operation.

(f) Inward carriage and freight charges on special materials.

(g) Cost of patents and royalties.

(h) Cost of defective work, e.g. where several trial castings are necessary before an appropriate one is obtained. The cost of such castings shall be taken as a direct expense.

(i) Sub-contracting expenses.

Characteristics

1. An important characteristic of direct expenses is that its utility is finished in a single production of a single work order. In case the utility of an expense can be extended to a number of work orders, it will be considered as an indirect expense.

2. Direct expenses are a part of prime cost or direct costs of a product or service.

3. By definition itself, direct expenses exclude expenses incurred other than on direct materials and direct labour. Thus, virtually, these are other direct expenses.

4. Allocation of direct expenses to cost centres (products or services etc.) is complete. There is direct charge and the question of apportionment does not arise.

Whether an expense should be regarded as a direct expense or an indirect expense depends upon the circumstances as also the nature of business. Occasionally, convenience is also one of the factors which may be adopted by managements to determine whether an expense be treated as a direct one or an indirect one. Last but not the least, the quantum of expenditure may also be considered while classifying an item of expense as direct or otherwise.

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