Business 315 and Analyzing Direct Costs Analyzing

Business 315 and Analyzing Direct Costs Analyzing Costs It is crucial for an organization to properly calculate semi-variable costs in order to allocate indirect and direct costs. These costs govern over direct materials, which are "materials that physically become part of a product or service and therefore are clearly indentified with specific outputs or service" (Thompson 2011). Semi-variable costs change often, depending on the volume of the output. These mixed costs are associated with both fixed and variable elements to production.

These costs are often broken up using the cost-volume formula which takes into account activity measures like labor as well as the fixed costs and variable unit rate. This helps an organization then outline indirect costs, which are those costs that are unable to be specifically outlined or traced according to a corresponding cost object (Thompson 2011). Essentially, indirect costs are associated with activities of an organization or enterprise business which can be accounted for in accounting notations, but not necessarily tied to cost objects, like direct costs are (Ruth 2012).

Direct costs are also important to be accounted for. Here, the research suggests that direct costs are "the cost of resources directly consumed by an activity" which "are assigned to activities by direct tracing of units and resources consumed by individual activities" (Thompson 2011). Direct costs are associated with single cost items. To calculate direct costs, organizations must first measure resources being consumed, or cost items, and then match these items with the cost associated to cost objects.

Then, "they account for the prices paid (historical cost) to acquire cost items and adjust those prices to reflect economic reality" (Thompson 2011). There are a number of ways these costs can be accounted for, There are top-down approaches, which are often most appropriate when specific details are unavailable, bottom-up methods which is the opposite and used when these more specified details are available (Ruth 2012). Additionally, expert judgment, work forward and back, and activity-based costing are included as popular methods of accounting for costs within a number of organizations.

Once allocated, it is important for an organization to continually analyze direct costs. Yet, there are a number of potential issues which can occur in regards to the misjudgment of direct costs. It is important for organizations to account for potential changes in the inflation rate when deciding upon direct costs (Thompson 2011). This is often overlooked, or miscalculated, which can be a common mistake in the analysis of evaluating direct material. Such mistakes can reduce cost effectiveness and lower potential profit margins when unaccounted costs arise in book keeping.

Moreover, wrongfully evaluating costs of direct labor can become an issue in organizations as well. According to the research, direct labor is the "work directly involved in making a product or in providing a service" (Thompson 2011). The standard rates in the industry do impact the overall evaluation of direct costs, which can cause some misjudgments as well. In this, an organization must take into account the industry standard in.