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What is the role of Direct Cost and Indirect Cost in a Budget?

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Asked: June 29, 20202020-06-29T18:12:44-07:00 2020-06-29T18:12:44-07:00In: Construction
Manasa Kitti
Manasa Kitti

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What is the role of direct cost and indirect cost in a budget?

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  1. AdityaBhandakkar

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    AdityaBhandakkar User
    2020-10-13T21:25:28-07:00Added an answer on October 13, 2020 at 9:25 pm

    Hi Manasa,

    Welcome to Theconstructor.org

    This is a detailed answer on Direct and Indirect Expense/cost is described

    Expenses are amounts paid for goods or services purchased. They can either be directly or indirectly related to the core business operations. Type of cost and Timing at which it is incurred by the business frames the critical points of difference between direct and indirect expenses.

    Examples of direct and indirect expenses – Rent, light, salaries, wages, sales, etc. Direct and indirect costs are defined and differentiated as follows;

    Direct Expenses

    Direct,” as the word suggests, are those expenses that are entirely related and assigned to the core business operations of a company. They are mainly related to purchases and production of goods/services. Direct expenses are a part of the prime cost or the cost of goods sold by a company.

    Direct expenses are directly related to the production of the product sold or service rendered. They may differ for different companies, such as manufacturing companies, construction companies, service companies, etc.

    Direct expenses are shown on the debit side of a trading account.

    Examples of Direct Expenses

    · Wages

    · Factory rent

    · Cost of raw material

    · Premises renting

    · Fuel

    · Carriage inwards

    Indirect Expenses

    Unlike direct, indirect expenses are not directly related and assigned to the core business operations. Indirect expenses are necessary to keep the business up and running, but they can’t be directly related to the core revenue-generating products or services’ cost.

    Just like direct expenses, indirect expenses can also be different for different types of organizations. These are usually shared costs among different departments/segments within the firm.

    Indirect expenses are shown on the debit side of an income statement.

    Examples of Indirect Expenses

    · Salaries

    · Telephone bills

    · Printing & stationery

    · Legal & Accounting charges

    · Carriage outwards

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  2. nikeetasharma

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    2020-10-12T00:37:48-07:00Added an answer on October 12, 2020 at 12:37 am

    DIRECT COST :-

    Direct costs are expenses that a company can easily connect to a specific “cost object,” which may be a product, department or project. This can include software, equipment and raw materials. It can also include labor, assuming the labor is specific to the product, department or project. Labor and direct materials constitute the majority of direct costs.

    INDIRECT COST :-

    Indirect costs extend beyond the expenses you incur creating a product to include the costs involved with maintaining and running a company. These overhead costs are the ones left over after direct costs have been computed.

    The materials and supplies needed for a company’s day-to-day operations are examples of indirect costs. While these items contribute to the company as a whole, they are not assigned to the creation of any one service.

    Indirect costs include supplies, utilities, office equipment rental, desktop computers and cell phones. Much like direct costs, indirect costs can be both fixed and variable. Fixed indirect costs include things like rent. Variable costs include the fluctuating costs of electricity and gas.

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  3. Soumyadeep Halder

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    Soumyadeep Halder User
    2020-07-02T18:36:11-07:00Added an answer on July 2, 2020 at 6:36 pm

    Well, that is a good question.

    1st to 1st

    total cost equal to you can say a combination of direct cost as well as an indirect cost

    so ,

    Total Project Cost = Project Direct Costs + Project Indirect Costs

    Direct Costs

    The costs and expenses that are accountable directly on a facility, function or product are called as direct costs.

    In construction projects, the direct costs are the cost incurred on labor, material, equipment, etc.

    Indirect Costs

    The costs are not directly accountable for a particular facility, product, or function. Indirect costs can be either variable or fixed.

    The main sections coming under indirect costs are personnel costs, security costs, and administration costs.

    So you can say you can not variate direct cost because it is the mandatory cost whereas indirect cost you can variate as per your project situation,

    in one word role of direct cost is very high rather than indirect cost. Direct cost is your 1st priority.

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  4. Preet Chovatiya

    Preet Chovatiya

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    Preet Chovatiya Learner
    2020-07-02T18:39:27-07:00Added an answer on July 2, 2020 at 6:39 pm

    Direct cost and Indirect cost plays the main role in any project budget.

    Direct cost is the cost that is related to the direct purchasing of any items or material on-site like cement, wood, steel, etc.

    Indirect cost is the overhead cost, which includes the cost like stationery cost, electricity bill, library cost, cost of heat or air conditioning, security expenses, admin expenses, etc.

    Direct and Indirect costs should be calculated perfectly; otherwise, It will be a loss in profit and as well as the budget affected by that.

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  5. poojan

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    2020-07-02T18:40:50-07:00Added an answer on July 2, 2020 at 6:40 pm

    Direct cost is the cost that is directly related to project costs such as cost of materials, equipment, and any other cost which may be directly related to the project.

    And the indirect cost is such cost, which is indirectly related to the project, which includes stationary cost, furniture cost, manpower cost, etc.

     

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  6. Kuldeep Singh

    Kuldeep Singh

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    Kuldeep Singh Learner
    2020-07-03T22:50:04-07:00Added an answer on July 3, 2020 at 10:50 pm
    What is the role of Direct Cost and Indirect Cost in a Budget?

    Firstly, budget = direct costs + indirect costs.

    In other words, the total expenses in a project can be categorized into direct and indirect costs.

    Direct costs, as the name suggests, are the basic monetary requirements for the project and are directly related to the work breakdown structure. They include material costs, labor costs, equipment costs and rents, workshop costs, etc.

    Indirect costs, are the costs that are indirectly incurred to sustain the activities demanding direct costs. For example, electricity bills, taxes, material transportation costs, permit costs, security expenses, labor welfare costs, etc.

    Direct costs tend to decrease, and indirect costs tend to increase when the project duration is increased. So, we can play around with the duration to optimize the budget or play around with the direct and indirect costs to speed up the project execution. That’s where these two costs are most important to the project manager. Usually, he would plot these against project duration and try to optimize the budget and duration graphically.

    There is a popular operation called crashing, in which any time after project commencement, the manager may want to speed up the construction due to pending work or delay. He then looks up how much the budget will increase in how many days’ reduction, and set up an acceptable amendment in the schedule.

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  7. Vivek Patel

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    2020-07-27T15:13:28-07:00Added an answer on July 27, 2020 at 3:13 pm

    Directly cost is directly related to the particular activity cost, that means material cost like

    Material cost

    Manpower cost

    Machinery cost

    Special equipment cost etc

    indirect cost is indirectly related to the activity like

    Cost of electricity

    water charge

    Stationery and office charge

    Supervising charge

    Machinery rent charge

    Liquidity charge etc

    Total cost is = direct charge + indirect charge

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  8. Vivek Patel

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    Vivek Patel User
    2020-07-27T15:22:06-07:00Added an answer on July 27, 2020 at 3:22 pm

    Directly cost is directly related to the perticular activity cost, that means material cost like

    • Material cost
    • Manpower cost
    • Machinery cost
    • Special equipment cost etc

    indirect cost is indirectly related to the activity like

    • Cost of the electricity
    • water charge
    • Stationery and office charge
    • Supervising charge
    • Machinery rent charge
    • Liquidity charge etc

    Total cost is = direct charge + indirect charge

     

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