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Question
Classify cost according to its nature.
Solution
- Direct Cost: Direct costs are those costs that can be easily, directly, and wholly related to a particular cost unit or cost centre. These consist of direct material costs, direct labour costs, and direct expenses. Materials used in the production of a specific unit, wages paid to workers directly engaged in manufacturing, and excise duty are examples of direct costs.
- Indirect Cost: Indirect costs are those that cannot be identified easily, directly, or wholly with a particular cost unit or cost centre. These comprise indirect materials, indirect labour, and indirect expenses. Fuel, the wages of storekeepers, and rent are examples of indirect costs. Indirect costs are also known as overheads or common costs.
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