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A ASSIGNMENT ON EXAMPLES WHERE DIRECT EXPENSES ARE NOT INCLUDED IN THE COST OF PRODUCTION

SUBMITTED TO: PROF JAYDEEP SIR

SUBMITTED BY: PARIKH ARIST J SHAIKH HUSSAIN STD DIV ROLL NO : MBA SEM-II :C : 100,102

Bhagwan Mahavir Institute of Management Affiliated To Gujarat Technological University 2013-2014

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INDEX
SR NO TOPIC PAGE NO

CH 1

INTRODUCTION
DIRECT EXPENSES INDIRECT EXPENSES DIRECT V/S INDIRECT EXPENSES

3-4 3 4 4

CH 2

TOPIC OF DISCUSSION

CH 3

CONCLUSIONS

CH 4

BIBLIOGRAPHY
BOOKS SITES

7 7 7

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CH 1 INTRODUCTION

DIRECT EXPENSES:DEFINITION According to cost accounting standard (CAS), Expenses relating to manufacture of a product or rendering a service, which can be identified or linked with the cost object other than direct Material cost and direct employee cost. Examples of Direct Expenses are royalties Charged on production, job charges, hire charges for use of specific equipment for a Specific job, cost of special designs or drawings for a job, software services specifically required for a job, travelling Expenses for a specific job.

MEANING Direct expenses are those expenses that are paid only for the business part. For example, if you pay for painting or repairs only in the area used for business, this would be a direct expense. Direct expenses are the part of expenses classification. In expenses classification, we can divide total expenses into direct and indirect. Direct expenses are relating to production and purchasing of goods. All expenses which are incurred for production or purchasing are called direct expenses. It is the part of prime cost of company's product. It shows the debit side of trading account. Following are its main examples.

1. Freight 2. Carriage inward 3. Wages 4. factory expenses

Page |4 5. oil and fuel 6. factory fixed assets' depreciation 7. Royalty on production 8. Import duty 9. Excise duty 10. Clearing and Port Charges

INDIRECT EXPENSES:Indirect Expenses are those expenses that are paid for keeping up and running your entire business. Examples of indirect expenses generally include insurance, utilities, and general repairs. Since these are expenses you would pay for the entire business, these are considered indirect expenses.

DIRECT V/S INDIRECT EXPENSES:-

DIFFERENCE

DIRECT EXPENSES

INDIRECT EXPENSES

Meaning

Those expenses that are directly charged to a cost centre are direct expenses.

Those expenses which cannot be charged to a specific job or a cost centre are indirect expenses. The benefit of such expenses goes to more than one job or cost centre. Factory rent, insurance, electricity charges, salary, advertisement, directors fees etc.

Benefits

The benefits of such expenses are received by a specific job only.

Expenses included

Architects fees, royalty paid to landlord, travelling expenses etc.

Included

They are included in prime cost of a product

They are included in factory overheads, administrative overheads, selling overheads etc.

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CH 2 TOPIC OF DISCUSSION

EXAMPLES WHERE DIRECT EXPENSES ARE NOT INCLUDED IN THE COST OF PRODUCTION:Direct expenses are those which can be directly charged to a specific job or cost centre and are included in prime cost. Most of the direct expenses are absorbed in the cost of production, e.g. wood used in producing books, leather used in preparing shoes. However, if an item which is a part of the direct expense constitutes a trivial amount as compared to the overall expenses, then the costs incurred on that item are not absorbed as direct expense in the cost of a unit product. Example, 1) Power expenses for running machines can be directly charged to production of that particular machine or cost centre. But meters are not generally installed for each machine, cost centre, or department. Hence, power expenses are treated as indirect expenses.

2) When a firm buys special tool or equipment for a particular order or job, it should be treated as direct expense for that job. However, if such tools or equipments are useful for future production, the whole of its cost is not treated as direct expenses. Only a proportionate amount is treated as direct expense.

3) When travelling expense of Rs 100 is incurred for signing a contract for producing a steam turbine, it is not worthwhile to include the cost as direct expense.

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CH 3 CONCLUSION
1) When the expenses incurred in production of any unit of product or service are of minimal amount then they are taken as indirect expense rather than direct expense even if they are directly related to the cost of product or service.

2) When the direct expenses are carried on a long term interval then the expenses may be partly or fully taken as indirect expenses.

3) When the direct expense is difficult to allocate among the number of units of production then the expenses are taken as indirect expenses.

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CH 4 BIBLIOGRAPHY

BOOKS:Management accounting By Pareh Shah (Oxford University Press) Topic no.5 Direct Expenses and Overheads Pg no.133-162

SITES:http://education.svtuition.org/2010/05/direct-expenses.html http://www.taxslayer.com/support/613 http://wiki.answers.com/Q/Direct_expenses_list