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Analysis of Direct Costs - Research Paper Example

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One of the costs that should be given special attention is collateral costs. These are costs that are incurred when acquiring the materials needed. Collateral costs could either…
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Analysis of Direct Costs
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During analysis of direct materials and direct costs, several issues relating to costs tend to occur. One of the costs that should be given special attention is collateral costs. These are costs that are incurred when acquiring the materials needed. Collateral costs could either be treated as direct costs or indirect costs depending on the company guidelines (Drury, 2007). However, the chosen method should be in line with how the company handles other types of costs. Collateral costs include transportation costs and in transit insurance costs (Drury, 2007).
The other type of costs that is associated with direct material cost analysis, is the material related costs. These are costs incurred when a firm purchases excess materials to ensure there are adequate materials for production (Drury, 2007). These are costs that come about due to scrap, overruns, spoilage, and defective parts. Materials not used due to overruns, scrap or spoilage still have residual value or salvage value. A company might decide to sell the excess materials or use them for further production, either way adjustments have to be made to include the residual value (Drury, 2007). Where a residual value of the excess materials has been established, a firm might adjust direct material cost by subtracting the estimated residual value (Drury, 2007).
To avoid problems that arise when analyzing direct materials and direct costs, one should do a further analysis so as to identify ineffective and uneconomical practices (Drury, 2007). This should be done before any direct cost analysis is carried out so that one could be able to:
1. Recognize any direct material that should be labeled as an indirect cost.
2. Recognize any direct material costs that require special attention because of high-value or other reasons.
3. Recognize any proposed direct material that does not appear essential to the contract effort.
4. Ensure that any preliminary concerns about material cost estimates are well spelled out
5. Ensure one is familiar with the methodology used by the firm to estimate direct material cost.
Reference
Drury, c. (2007). Management and Cost Accounting (7th ed.). London. Cengage Lrng Business Press. Read More
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