Saturday, April 18, 2009

Direct Or Indirect Costs And Benefits

From a cost accounting t of view, costs are handled differently depending on whether they are or indirect. Direct costs are those with which a dollar figure can be direct associated in a project. They are applied directly to the operation. Example, the purchase of a box of diskettes for $35 is a direct cost because we can associate the diskettes with the dollars expended. Direct benefits also can be specifically attributable to a given project. For example a new system that can handle 25 percent more transactions per day is a direct benefit.

Indirect costs are the results of operations that are not directly associated with a given system or activity. They are often referred to as overhead. A system that reduces overhead realizes a savings. If it increases overhead, it incurs an additional cost. Insurance, maintenance, protection of the computer center, heat, light, and air conditioning are all tangible costs, but it is difficult to determine the proportion of each attributable to a specific activity such as a report. They are overhead and are allocated among users according to a formula.

Indirect benefits are realized as a by-product of another activity or system. For example, our proposed safe deposit billing system that provide profiles showing vacant boxes by size, location, and price, will help management -decide on how much advertising to do for box rental. Information about vacant boxes becomes an indirect benefit of the billing even though it is difficult to specify its value. Direct and indirect costs and benefits are readily identified for tangible costs and benefits, respectively.

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