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Suppose the company produces trousers and shoes.Lehman Brothers is often cited as an example of corporate governance failure largely due to poor oversight by the board. ExampleĬlassify the following costs as (D) direct costs or (ID) indirect costs in relation to a specific product. These costs are commonly shared by multiple products, different departments, or branches hence, such costs cannot practically be traced to a cost object.Įxamples of indirect costs include factory overhead costs, organization-wide advertising, taxes, and other common or joint costs. Indirect costs are difficult to trace directly to a specific cost object. Also, the salaries of the sales personnel of "Branch A" can be traced directly to that branch.

For example, salaries of sales personnel are directly traceable to the selling department of the organization. If the cost object is a department or a branch, all costs that can be associated directly to a particular department or branch are direct costs. However, the cost spent for electricity is not directly traceable to the food containers since such cost was not used solely for the production of the product.Įxamples of direct costs include direct materials, direct labor, and other costs incurred for a particular product such as advertising and promotion costs for, say "Product A".

The cost of plastic used in production can be easily traced to the food containers.

A cost object is something for which cost is measured such as a specific product, a specific department or a specific branch.įor example, ABC Company produces plastic food containers. Direct costs are those that can be easily traced to or associated directly with a specific cost object.