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Direct and indirect costs are two fundamental classifications of costs in managerial accounting. The distinction between them is important because managers need accurate cost information for planning, controlling operations, determining product profitability, fixing prices, preparing budgets, and making business decisions. The basic difference lies in whether a particular cost can be conveniently and economically traced to a specific cost object, such as a product, service, department, project, or customer. A direct cost is a cost that can be specifically and conveniently identified with a particular cost object. A cost object may be a product, job, service, department, or project for which cost information is required. Direct costs are incurred specifically for producing a particular product or providing a particular service. Because their relationship with the cost object is clear, they can normally be assigned to that cost object without using an arbitrary allocation method. The most common examples of direct costs are direct materials and direct labour. Direct materials are those materials that become an identifiable and measurable part of a finished product. For example, wood used in manufacturing a particular table is a direct material cost of that table. Similarly, steel used to manufacture a particular machine can be directly traced to that machine. Direct labour refers to wages paid to workers who are directly engaged in manufacturing a product or providing a service. The wages of a carpenter making furniture, for example, can be directly associated with the furniture produced. Other examples of direct costs include special equipment purchased for a particular project, royalties based on units produced, and transportation costs incurred specifically for a particular customer order. If a construction company undertakes a particular building __________ _____ ___ ______ ___.
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