The Differences Between Variable Costs and Indirect Costs (Essay Sample)
What are the differences between VARIABLE COSTS AND INDIRECT COSTS and how are they usually allocated to Revenue Producing Departments or Units in HCO’s? Why are the methodologies selected for allocation important? The primary distinction between variable and indirect costs is that variable costs are directly tied to the manufacture of products or services, whereas indirect costs are not. Indirect costs are also known as overheads or overhead expenses. Some common indirect costs include labor, rent, and marketing expendituressource..
The Differences Between Variable Costs and Indirect Costs
Expenses that rise and fall with production and sales are known as variables. Indirect expenses are ones that aren't directly tied to making or selling the product or service in question (Smith et al., 2021). Examples of variable costs include materials, labor, and overhead costs. Indirect costs include shipping and handling fees, marketing, and research and development expenses. Together, variable and indirect costs are known as the cost of goods sold (COGS). COGS is the cost of producing a good or service. It includes both variable and indirect costs.
The primary distinction between variable and indirect costs is that variable costs are directly tied to the manufacture of products or services, whereas indirect costs are not. Indirect costs are also known as overheads or overhead expenses. Some common indirect costs include labor, rent, and marketing expenditures (Drury, 2018). All these expenses are incurred by businesses regardless of the quantity or quality of the output. In contrast, variable costs are directly related to the output produced. For example, the cost of raw materials used in producing a product directly reflects how much work was expended to get that raw material (Bonafede et al., 2018). The labor cost used to produce a product is also a direct reflection of the number of labor hours required. As a result, the lower the labor, the greater the output achieved. In contrast, the cost of the raw materials utilized in the production of a product rises as the quantity generated rises. Similarly, the cost of work hours utilized to manufacture a product rises as the quantity generated rises.
Allocating variable and indirect costs to revenue-producing departments or units includes assigning them based on the percentage of total revenue that each department or unit generates, basing them on how much work is required to produce a unit of output, and using a cost-plus or profit-sharing system(Bonafede et al.,2018). Variable costs are associated with inventory costs, which means they are assigned to production units and registered in inventory valuation, such as the cost of selling goods. In contrast, fixed expenses are any costs that cannot be inventoried. Fixed costs are expenses that do not vary directly from total production (Drury, 2018). Indirect costs can be allocated by taking one's total indirect charges and dividing them by some allocation metric, such as direct labor cost, direct system costs, or direct cost of materials.
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