costing and control of factory over head

Cost pertaining to a cost centre or cost unit may be divided into direct costs and indirect costs. Direct costs are those, which are incurred for and may be conveniently identified with a particular cost centre or cost unit. Materials used and labour employed in manufacturing an article or in a particular process of production are common examples of direct costs. Indirect costs are those cost which are incurred for the benefit of a number of cost centres or cost unit. Indirect cost, therefore, cannot be conveniently identified with a particular cost centre or cost unit. Examples of indirect costs include rent of building, management salaries, machinery depreciation etc. It should be appreciated that the nature of the business and the cost unit chosen will determine which are direct and which are indirect costs. For example, the hire of mobile crane for use by a contractor at site would be regarded as a direct cost but if the crane is used as a part of the services of a factory, the hire would be regarded as indirect cost because it will probably benefit more than one cost centre. The importance of the distinction of costs into direct and indirect lies in the fact that direct costs of a product or activity can be accurately determined while indirect costs have to be apportioned on certain assumptions as regards their incidence.

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