Question 3

The cost, which is related specific cost object and economically traceable will be classified
as:
a. Indirect cost
b. Fixed cost
c. Variable cost
d. Direct cost

Answer-

Lets define above mentioned cost one by one-

a. Indirect Costs- Indirect costs are those costs that can not be directly charged to a specific
cost object. Instead, We can allocate them using a method of cost of allocation like
production hours, labour hours, floor space, quantity of product produced, quantity of
product sold etc. They can be fixed or Variable depending upon their nature. Activity cost
method is one of the accurate method to allocate these costs.
Example-
1. Rent of Factory
2. Salary of Administrative staffs
3. Legal and Accounting Expense
4. Marketing Expenses
5. Depreciation
b. Fixed Expenses- Fixed Expenses are those expenses which do not change if we
increase/decrease the level of production. They remain constant in every month. These costs
are also called Uncontrollable costs as it can not be eliminated, but it can be minimised with
proper planning.
Examples-
1. Rent of Factory
2. Salary of staffs
3. Insurance Cost
4. Internet and telephone charges
5. Loan repayment
6. Professional Fees
c. Variable Costs- Variable costs are those costs which change with level of output. It decreases
when we decrease production and increases when we increase production. It is not fully
controllable, we can optimise the processes, negotiate with suppliers, improve productivity
to reduce these costs.
Examples-
1. Raw Material
2. Direct Labours
3. Packaging Materials
 4. Electricity, fuels
d. Direct Costs- Direct costs are the expenses that can be directly linked to the production of
specific products. They are essential for the production for that specific products. Like if we
are manufacturing a cloth, the Fabric would be a direct cost.
Examples-
1. Raw Material
2. Direct Labour
3. Components
4. Wages to Labourers

In conclusion, the cost that is specifically related to a particular cost object and can be
economically traced to that cost object is classified as a Direct Cost. So, the correct answer to your
question is (d) Direct Cost.