Expenses may be defined as “the costs of services provided to an undertaking and the notional costs of the use of owned assets”.
Direct expenses are those expenses which are directly chargeable to a job account. Direct expenses may be defined as those expenses which are easily identifiable and attributable to the individual units or jobs. All expenses other than the direct material or direct labour which are incurred for a particular product or process are termed as direct expenses. Expenses which can be identified with a territory, a customer or product can be considered as direct expenses. Expenses in relation to a department may be direct but are indirect in relation to the product.
*Direct expenses are defined as “costs, other than materials or wages, which are incurred for a specific product or salable service.”
Nature of Direct Expenses
Direct expenses are directly attributed to cost unit/cost center. It includes all direct cost except the direct material and direct labour.
Types of Direct Expenses are as under:
- Royalties if it is charged as a rate per unit.
- Hire charges of plant if used for a specific job.
- Sub-contract or outside work, if jobs are sent out for special processing.
- Salesman’s commission if it is based on the value of units sold.
- Freight, if the goods are handled by an outside carrier whose charges can be related to individual units.
- Travelling, hotel and other incidental expenses incurred on a particular contract.
- Cost of making a design, pattern for a specific job.
- Cost of any special process not forming part of the normal manufacture like water proofing for canvas cloth.
Accounting Treatment of Direct Expenses
Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books.
The term ‘direct expenses’ has been excluded from prime cost as per latest CIMA terminology, i.e. according to CIMA, prime cost is “the total cost of direct material and direct labour”
Accounts are prepared in columnar form so that the analysis can be made and the expenses can be related to the specific job/contract.
In cost accounting records, the direct expenses account is credited and the concerned account is debited. The cost department should verify from the accounts department that the expenses are properly booked. These expenses should not be mixed up with overheads.
Control of Direct Expenses
Items under this head are few. They form a small part of the total cost. Such costs are controlled by fixing standards. The actual should be compared with the standard. The causes of variations, if any, should be ascertained and necessary corrective action should be taken.
