Which of the following statements is true of direct costs? Select one:
a. A direct cost of one cost object is a true sense of the budgeted costs.
b. All variable costs are direct costs.
c. A direct cost of one cost object can be an indirect cost of another cost object.
d. All fixed costs are direct costs.
The correct answer and explanation is:
Correct Answer: c. A direct cost of one cost object can be an indirect cost of another cost object.
Explanation:
Direct costs are expenses that can be clearly and easily traced to a specific cost object, such as a product, department, or project. Examples include raw materials used in manufacturing a specific product or wages paid to workers on a specific project. These costs are directly attributable to the output they help produce.
However, the classification of a cost as direct or indirect depends on the cost object being considered. A cost that is direct in one context may be indirect in another. For example, the salary of a production supervisor may be a direct cost when analyzing the cost of operating a specific department. But if the cost object is an individual product within that department, the supervisor’s salary becomes an indirect cost because it cannot be directly traced to one product.
Let’s evaluate the other options:
a. A direct cost of one cost object is a true sense of the budgeted costs — This is inaccurate because budgeted costs refer to estimated amounts, not necessarily the actual traceability of a cost to a cost object.
b. All variable costs are direct costs — This is incorrect. While many variable costs are direct, not all are. Some variable costs like utilities may vary with activity but are shared across multiple cost objects, making them indirect.
d. All fixed costs are direct costs — This is incorrect. Many fixed costs, such as rent or salaries of administrative staff, are not directly traceable to a single cost object, making them indirect.
Therefore, the only accurate and complete statement is option c, which highlights the contextual nature of cost classification.