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CMA Foundation · Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)

In a company's costing records, which item is correctly classified as an indirect expense rather than a direct expense?

Factory rent is an indirect expense because it benefits all products made in the building and cannot be traced to a single cost unit. Machine hire for one job, per-unit design fees and experimental work for one order are specifically attributable, hence direct expenses.

  1. AHire charges of a special machine used only for one job
  2. BCost of a patented design fee payable per unit produced
  3. CFactory rent for the building where all products are madeCorrect
  4. DCost of experimental work done specifically for one customer order

Explanation

Direct expenses are those other than material and labour that are traceable to a specific cost unit or job. Factory rent serves all products and cannot be traced to one, so it is indirect. The other three are specifically attributable to a job or unit.

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