University / Institut: Erbil tecnology

institute

Section: Road construcion institute

Class: The second / RA_R3

Estimating and Controlling of Direct

and Indirect Costs of project

student's name: Khanda habeeb raheem

teacher's name: saud hussein

Subject name: Quantity surving

Presentation time: 20/8/2020

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Content:

4.Direct costs and indirect costs.

5.Difference between Direct Costs

and Indirect Costs

6.Examples Direct Costs and

Indirect Costs

9.Understanding Indirect Cost and

direct costs

11.Direct costs and indirect cost

Classification

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 • Estimating and Controlling of
Direct and Indirect Costs of
project

Understanding Cost Accounting

Cost accounting is used by a company's internal management team to identify all
variable and fixed costs associated with the production process. It will first
measure and record these costs individually, then compare input costs to output
results to aid in measuring financial performance and making future business
decisions. There are many types of costs involved in cost accounting, which are
defined belo

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Cost accounting is an accounting process that measures all of the costs
associated with production, including both fixed and variable costs. The purpose
of cost accounting is to assist management in decision-making processes that
optimize operations based on efficient cost management. The costs included in
cost accounting are as follows:

Direct Costs
Direct costs are related to producing a good or service. A direct cost includes raw
materials, labor, and expense or distribution costs associated with producing a
product. The cost can easily be traced to a product, department, or project. For
example, Ford Motor Company (F) manufactures cars and trucks. A plant
worker spends eight hours building a car. The direct costs associated with the
car are the wages paid to the worker and the cost of the parts used to build the
car.

Indirect Costs
Indirect costs, on the other hand, are expenses unrelated to producing a good or
service. An indirect cost cannot be easily traced to a product, department,
activity, or project. For example, with Ford, the direct costs associated with each
vehicle include tires and steel. However, the electricity used to power the plant is

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considered an indirect cost because the electricity is used for all the products
made in the plant. No one product can be traced back to the electric bill.

Difference between Direct Costs and Indirect

Costs
Direct costs are costs that can be directly attributed to a specific project, e.g. labor,
raw materials, and equipment rental costs. Indirect costs are costs that cannot be
directly attributed to a specific project, e.g. management, general administration,
rental and utility costs. In other words, indirect costs are those for activities or
services that benefit more than one project.

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Examples of direct costs include:
• Employee salaries and benefits

• Labor costs

• Materials costs

• Equipment rental costs

• Project related travel costs

Examples of indirect costs include the costs of:

• Management

• General administration

• Building rental

• Utilities

• Security

• Advertisement

• Insurance

• Legal

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Let’s take a specific case of an IT services company operating out of a rental
facility and handling multiple projects of varying sizes and durations from the
facility.

In such an environment, direct costs would

include:

• Salaries and benefits of the staff working on the project

• Costs of computers, printers, network and other equipment allocated for

the project, and that of the associated maintenance and support

• Costs of software licenses

• Costs of project related travel

• Costs of staff training

• Costs of team-building activities

Indirect costs would include:

• Salaries of executives and directors who are overseeing multiple projects

• Rental cost of the building (it would be very hard to distribute the
monthly building rental to the various projects running in that facility)

• Utility costs (electricity, telephone, broadband, water etc.)

• Administrative costs

• Costs of equipment shared by multiple projects (like shared printers)

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Are Indirect Costs included in Project
Estimates?
Direct costs are included in the project cost estimate (and budget), whereas
Indirect Costs may or may not be included in the project cost estimate. According
to the PMBOK® Guide, 5th Edition the project assumption of whether indirect
costs are included or excluded from the project cost estimates are documented in:

• Project Scope Statement

• Basis of Estimates document

Direct and Indirect Costs consideration in

Make-or-Buy Decisions
Both direct and indirect costs should be considered while making Make-or-Buy
decisions on projects. Direct Cost would include the actual cost of purchasing the
product whereas, Indirect Cost would include the cost of supporting the
purchasing process and the purchased product.

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Understanding Direct Costs
Although direct costs are typically variable costs, they can also include fixed
costs. Rent for a factory, for example, could be tied directly to the production
facility. Typically, rent would be considered overhead. However, companies can
sometimes tie fixed costs to the units produced in a particular facility.

• A direct cost is a price that can be directly tied to the production of

specific goods or services.
• A direct cost can be traced to the cost object, which can be a service,
product, or department.
• Direct costs examples include direct labor and direct materials.
• Although direct costs are typically variable costs, they can also be fixed
costs. Rent for a factory, for example, could be tied directly to a
production facility.

What are indirect costs?

Indirect costs represent the expenses of doing business that are not readily
identified with a particular grant, contract, project function or activity, but are
necessary for the general operation of the organization and the conduct of
activities it performs. In theory, costs like heat, light, accounting and personnel
might be charged directly if little meters could record minutes in a cross-cutting
manner. Practical difficulties preclude such an approach. Therefore, cost

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allocation plans or indirect cost rates are used to distribute those costs to
benefiting revenue sources.

What is an indirect cost rate?

An indirect cost rate is simply a mechanism for determining fairly and
conveniently within the boundaries of sound administrative principle, what
proportions of Departmental/organization administration costs each programs
should bear. An indirect cost rate represents the ratio between the total indirect
costs and benefiting direct costs, after excluding and or reclassifying unallowable
costs, and extraordinary or distorting expenditures. (i.e., capital expenditures
and major contracts and subgrants). The indirect costs in the numerator of the
equation should bear a reasonable relationship to the direct costs from the
denominator. This will allow for each program or activity represented in the
direct costs base to assume their fair share of indirect costs when the rate is
applied.

Fixed vs. Variable

Direct costs do not need to be fixed in nature, as their unit cost may change over
time or depending on the quantity being utilized. An example is the salary of a
supervisor that worked on a single project. This cost may be directly attributed
to the project and relates to a fixed dollar amount. Materials that were used to
build the product, such as wood or gasoline, might be directly traced but do not
contain a fixed dollar amount. This is because the quantity of the supervisor's
salary is known, while the unit production levels are variable based upon sales.

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Direct Costs and Indirect Costs , Cost
Classification

Cost classification is an important concept in budgeting, accounting and project

management. Cost classification and categorization of expenses help project
teams to understand what kind of costs will be spent during the life cycle of their
project. For example, while creating the baseline budget , a cost control engineer
lists the direct cost and indirect cost in the construction project. Basically, Direct
costs and indirect costs are two different concepts used for budget planning and
accounting operations. However, there are some key differences between them. It
is not easy to make a certain list of direct and indirect costs all the time. Because
direct and indirect costs are based on the nature of the product and business.
Typically, direct costs are attributable to a product, goods or service itself. Direct
costs are directly related to the product. On the other hand, indirect costs are
those required to produce the product however, they are not directly related to
the product. This article answers this question: what are the primary differences
between direct and indirect costs ?

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Sources

1. https://www.deepfriedbrainproject.com/2017/08/direct-costs-
vs-indirect-costs-project-management.html

2. https://www.investopedia.com/ask/answers/041415/what-are-
different-types-costs-cost-accounting.asp

3. https://www2.ed.gov/about/offices/list/ocfo/intro.html

4. https://www.investopedia.com/terms/d/directcost.asp

5. https://www.projectcubicle.com/direct-costs-and-indirect-costs-
cost-classification/?amp

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