English for Accounting

Leonita Mega Pratiwi

43219010035
 To Present & Explain Direct & Indirect Costs
and Provide a Case Related to it
Examples of Direct Costs
The most obvious examples of direct costs are the materials that go into producing the items you sell and the labor that
goes into creating it. If you manufacture clothing, the amount of fabric and thread you use will vary directly in proportion
to how many shirts you make. Even if you retail items that another business manufactures, the amount of inventory you
purchase will vary, relative to how many items you sell. Similarly, you'll pay your employees for a greater number of hours
if they make 200 shirts than if they make 20.
Examples of Indirect Costs
The rent you pay on your facility is an indirect cost because it does not fluctuate to your sales volume. The utilities costs
you incur to keep your operation going are considered indirect costs, as well, because you have to keep your lights on and
your rooms heated whether your business is thriving or struggling.
Examples of Direct and Indirect Costs
Direct and indirect costs are accounting concepts that help you separate expenditures that fluctuate, relative to how much
business you transact, and costs that stay mostly the same, whether you sell one item or one thousand. Direct costs are
considered direct because the expenses incurred go directly into the products or services you sell
What Percentage Should You Mark Up Your Material for Doing HVAC Work?
Accounting numbers help you tunderstand the workings of your business so you can make necessary
adjustments and become more profitable. The expenditures on your income statement are organized to
distinguish between the costs that funnel directly into revenue, and those that contribute to the background
and infrastructure that keep your business running and set the stage for you to earn this revenue.

Costs that Fall into Gray Areas

Although the distinction between direct and indirect costs is useful for accounting, it is rarely clear cut in
real world situations. Many indirect costs such as utilities do actually fluctuate somewhat relative to your
sales volume. You'll use more electricity or water if you manufacture more stock. However, the correlation
between the wattage you use and the products you make is virtually impossible to untangle, unlike the
correlation between material produced and shirts sewn.
It's impossible to tease out all of these nuances when keeping your books, but
it's nonetheless important to keep in mind that the distinction between direct
and indirect costs is rarely clear and direct.

1. Overhead Vs. Direct Labor Costs

2. Are Direct Labor & Direct Material Variable
Expenses?
3. What Is the Definition of the Direct Cost of Sales?
4. What Is Unit Labor Cost?
 Direct labor costs are classified as variable costs because they differ more or less
directly relative to your revenue. It takes more work to manufacture 100 shoes than
it does to make 50. Although you'll be able to leverage some economies of scale as
Direct Labor Costs you produce more units, it's safe to assume that producing a greater number of units
requires an increased amount of labor. Calculating direct labor costs allows you to
better understand these economies of scale.

In addition to the labor that goes directly into producing the products you sell, your
business must maintain the physical and information systems that allow you to do
your production work and deliver the end results to your customers. Handling
inventory, shipping orders, compiling invoices, making sales calls and writing
Direct vs Indirect Labor employee paychecks all generate indirect labor costs that are tracked as part of
overhead costs rather than cost of goods sold, or indirect costs.

Direct costs are expenses that can be easily traced or connected to the items your
business produces or the services it provides
Direct Expenses