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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

In a cost accounting system, a company at Hosur records the wages of a worker employed on a specific customer job and also the salary of the factory manager. Which classification correctly describes these two items by traceability to a cost unit?

The worker's wages are a direct cost because they can be traced to the specific job, while the factory manager's salary is an indirect cost because it benefits all production and cannot be economically traced to a single cost unit.

  1. ABoth are direct costs
  2. BWorker's wages are direct cost; factory manager's salary is indirect costCorrect
  3. CWorker's wages are indirect cost; factory manager's salary is direct cost
  4. DBoth are indirect costs

Explanation

A direct cost can be economically traced to a cost unit such as a job. Wages of a worker on a specific job qualify. The factory manager supervises all production and cannot be traced to one job, so the salary is an indirect cost (overhead).

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