Q1.
An example of a direct cost at my workplace includes the cost of raw material used in the manufacturing of a product. An example of indirect cost in my workplace includes employee compensation claims, and consultancy fee. A direct cost denotes to the expense that a company incurs directly in relation to the activities of its operations in a department or unit (Ashe-Edmunds, 2017). Therefore, direct costs are specific cost objects for which a cost is compiled like a product, service, project or customer. They also include purchase of software, equipment and labor charges in form of salaries and allowances. In most instances, labor, equipment, and raw materials constitute the majority of direct costs. Therefore, most firms track the cost of finished raw materials as direct cost. It follows that expenses incurred in paying salaries and allowances account for a significant percentage of direct costs alongside the cost of raw materials.
An indirect cost goes beyond the cost related to the creation of a specific product to include the cost of maintaining and running the entire organization. These costs cannot be traced to one department or product but are incurred jointly across departments in an organization (Arline, 2015). The indirect costs may be referred to as overhead costs or administrative expenses. Imperatively, indirect costs include the cost of materials and supplies that are required for running the daily operations and include employee’s compensation claims in case of an accident, utilities like electricity and water, office equipment, consultancy services offered to the organization, and building maintenance expenses among others. Firms may also face both direct and indirect costs at the same time when injuries occur. For example, the direct costs of workplace injuries may lead to increased compensation and indirect costs associated with injuries and accidents of the employees (Arline, 2015). These indirect or hidden costs may include lower staff morale, decreased productivity and damaged equipment.
Delegate your assignment to our experts and they will do the rest.
Q2.
Our organization uses responsibility centers in its operations. A responsibility center is a unit, department, or segment of an organization with the capacity to control its costs, revenues or investments. Imperatively, responsibility centers are held accountable for the activities and functions which are their goals or objective. A responsibility center is a critical component of assessing a firm’s performance, especially the need to ensure that the operations are under control (Holtzman, n.d). Effectively, companies achieve this goal by viewing the organizations as segments or several units of operations. These organizations then use financial and non-financial control system to assess what the company is doing based on the responsibility centers. Using the assessment outcomes, the firm can take necessary decisions and steps in both short and long-term manner. Financial control offers the financial outcomes of the operation of each responsibility center in comparison to the expected or planned outcomes. Organizations use a single index to offer a broad assessment of the operations, and as such, they use financial terms like revenue, cost, and return on investment or profit (Holtzman, n.d). Due to this approach, responsibility centers are categorized as revenue centers, investment centers, cost centers and profit centers. In our organization, there are four types of responsibility centers that include revenue center, cost center, profit center, and investment center. By segmenting the entire organizational operations into business units called responsibility centers, our management can control each facet of the business in an effective manner. For instance, they can analyze and decide the business unit that requires expansion or to be closed in the worst case circumstance( Holtzman, n.d). As part of financial and accounting performance, these centers form a critical component of ensuring that companies gain the benefits of employees’ performance to attain their overall objectives and goals.
References
Arline, K. (2015) Direct Costs vs. Indirect Costs: Understanding Each; Retrieved from https://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html
Ashe-Edmunds, S. (2017) Examples of Direct and Indirect Costs; Retrieved from http://smallbusiness.chron.com/examples-direct-indirect-costs-72530.html
Holtzman, M.K. (n.d) Managerial Accounting: Types of Responsibility Centers; Retrieved from http://www.dummies.com/business/operations-management/managerial-accounting-types-of-responsibility-centers/
