Question

(a) What is the difference between Direct and Indirect Costs in a business?
(b) A machine with an initial cost of R 60 000 has an expected working life of 5 years. If it is depreciated linearly over this period, what will the ‘book value’ be at the beginning of year 4?
(c) Which is better for a normal business: Allowing payment terms of 60 days after invoice for your debtors or giving a 5% discount for payment within 7 days after invoice? Explain why?
(d) Explain using a simple example with relevant numbers, how the granting of sales discounts can affect the profitability of a business.

Answer 1

Direct cost: direct costs are business expenses that can be directly spend to produce a object, like goods or services. In direct cost it includes direct material direct labour and manufacturing supplies.

Indirect cost: is the cost which a general business expenses that keep you operating a firm. Indirect costs are rent, utilities l, office expenses, salary etc...

Difference: in direct cost the expenses that directly applied into producing goods or services .while in indirect its the cost that required for operating business. In direct cost the cost will help to create, develop and produce the product, but in indirect the cost is not directly related to the development of business firm for its products or services.