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Direct Cost Introduction A direct cost is a cost that is directly attributable to the manufacture of a product (or provision of a service). A good example of a direct cost is the cost of the materials needed to make a product. The usage of the materials is directly related to the manufacture of the product. Direct costs are very often variable costs and vice-versa, but the two are not synonymous: for example, the costs of running machinery used in manufacturing are not direct costs, but they ar
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   Direct Cost    1 Introduction   A direct cost is a cost that is directly attributable to the manufacture of a product (or provision of a service). A good example of a direct cost is the cost of the materials needed to make a product.The usage of the materials is directly related to the manufacture of the product.   Direct costs are very often variable costs and vice-versa, but the two are not synonymous: forexample, the costs of running machinery used in manufacturing are not direct costs, but they arelikely to be variable or semi-variable.There are three types of direct cost: ã Direct Materials, ã Direct Labour, and ã Direct Expenses.The last is anything that does not fall into the other two (commoner) categories.A method for tracking the cost of materials needs to be chosen: usually FIFO or LIFO,sometimes average cost or replacement cost.The sum of all three types of direct costs is called the prime cost.Any cost that is not a direct cost is an indirect cost.Direct cost is closely related to cost of goods sold, but is not necessarily the same (it may be insome businesses). Direct cost is a management accounting measure and can be calculated in theway that the management find most useful. Cost of sales is a financial accounting number andmust be calculated in accordance with accounting standards.   Direct Cost    2 In general, direct cost, is measured very narrowly, so related numbers such as cost of sales arelikely to be higher as they will include some indirect costs that can be attributed to products.Direct costs can be traced directly to a cost object such as a product or a department. In otherwords, direct costs do not have to be allocated to a product, department, or other cost object.For example, if a company produces artisan furniture, the cost of the wood and the cost of thecraftsperson are direct costs  —  they are clearly traceable to the production department and to eachitem produced  —  no allocation was needed. On the other hand, the rent of the building that housesthe production area, warehouse, and office is not a direct cost of either the production departmentor the items produced. The rent is an indirect cost  —  an indirect cost of operating the productiondepartment and an indirect cost of crafting the product. Direct Costs: Definition and List of Criteria Government Definition of Direct Costs: Direct costs (see NOTE below) are those costs that can be identified specifically with a particularsponsored project, or that can be directly assigned to such activity relatively easily with a highdegree of accuracy. Summary of Criteria for Determining Allowability of Direct Costs: For purposes of determining whether it would be appropriate to budget or charge a certain directcost on a government sponsored project, principal investigators, departmental business officersand grant administrators should be familiar with the criteria used to define allowable directcosts . They are:A.   The cost must be reasonable , i.e., the cost is generally recognized as necessary for theperformance of the project and is one that a prudent person would consider reasonablegiven the same set of circumstances;   Direct Cost    3 B.   It must be allocable to the sponsored project, i.e., the cost is incurred for the benefit of only one project or the item can be easily assigned to multiple benefiting projects. Aspecific project may only be charged that portion of the cost which represents the directbenefit to that project;C.   The cost must be treated consistently with other similar costs incurred in likecircumstances in accordance with generally accepted accounting principles; andD.   The cost must conform to any limitations or exclusions stated in generally acceptedaccounting principles or in the sponsored agreement, i.e., the cost must be allowable and not specifically designated as un allowable by regulation or grant/contract specificaward conditions.E.   If  sponsor funds are available, appropriate direct cost items should be charged tosponsor funds. Guidance for using appropriate Vanderbilt account codes is included inthe section of this Guide titled Account Coding . If sponsor funds are not available andit is determined that the scope of work of the project cannot be modified to eliminate theneed for the item, then the direct cost item should be charged to an appropriate cost-shareaccount [Note: internal approvals for cost sharing may be required] and reflected as a costof the project, but one borne by Vanderbilt.NOTE:  Direct Costs should be net of applicable credits. In accordance with Office of Management and Budget Circular A-21, Section C.5., the term applicable credits refers to those receipts or negative expenditures that offset or reduce direct cost items. Typical examples of such transactions are: purchase discounts, rebates, or allowances; recoveries or indemnities on losses; and adjustments of overpayments or erroneous charges.This term also includes 'educational discounts' on products or services provided specifically toeducational institutions, such as discounts on computer equipment, except where the arrangement is clearly and explicitly identified as a gift by the vendor.    Direct Cost    4 Representative List of Acceptable Direct Cost    Salaries, Wages, Fringe BenefitsExamples: Principal Investigator, Faculty Research Assistant, Scientist Technician,Scheduling Coordinator Post Docs, Graduate Students    Animals and Animal Care    Auto Rental    Subcontracts/Consultants    Equipment meeting federal threshold    Freight/Other Transportation    Page charges/Reprints/Reference materials    Lab Supplies & Materials Computer Software Chemicals Radioisotopes Test Tubes    Telephone Charges for collaborative work on the project    Service/Recharge centers    Rental of space or equipment    Trainee Costs for Training Grants Only Stipends, Tuition, Travel    Travel Transportation Meals/Lodging Foreign Travel (sponsor approval may be requiredfirst)    Patient Care Costs      Computer Hardware *    Meals & Refreshments/Alcohol *    Printing *    Office Supplies *      Telephone Charges *   *Costs may be considered direct if they qualify for an unlike circumstance. These costs must be clearly identified in the budget justification .
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