Commercial Applications
Which definition best describes indirect costs?
- Indirect costs are those costs which are not controlled directly by a manager.
- Indirect costs are those costs which cannot be directly associated with a product or service.
- Indirect costs are always fixed.
- Indirect costs are always manufacturing overhead cost.
Answer
Indirect costs are those costs which cannot be directly associated with a product or service.
Reason — The defining feature of indirect costs is lack of traceability — they cannot be easily, directly and wholly identified with a particular cost unit or cost centre. Option 1 describes uncontrollable costs, not indirect costs. Option 3 is incorrect because indirect costs may be fixed or variable. Option 4 is too narrow because indirect costs include not only manufacturing overhead but also office, administrative, selling and distribution overheads.
Related Questions
Assertion (A): Opportunity costs are relevant in business decision making.
Reason (R): Opportunity cost reflects the value of the next best alternative foregone when a decision is made.
- A is true but R is false
- A is false but R is true
- Both A and R are true and R explains A.
- Both A and R are true but R does not explain A.
It refers to the expenses incurred on those items which are not directly chargeable to production. Salaries of timekeeper, foremen and watchmen are examples of this cost. This cost is incurred for the concern as a whole rather than a particular product.
- Direct cost
- Indirect cost
- Selling cost
- Advertising cost
To control costs, it is essential to keep control on:
- Prime cost
- Overheads
- Indirect materials and tools cost
- All of these
Wages paid to a labour who was engaged in the production activities can be termed as ……………
- Direct cost
- Indirect cost
- Sunk cost
- Implicit cost