Question

Soles is a footwear company which has recently set up its store in Ambrosia. To manufacture its products, Soles incurs a range of different costs. Which of the following would be an example of an indirect cost?a. Salary paid to factory workersb. Cost of leather used to manufacture shoesc. Electricity used to run its factoriesd. Cost of machines to produce shoes

Answer 1

Answer:

Option C Electricity used to run its factories

Explanation:

The reason is that the direct costs are those that are easily attributable to the unit product and the costs that are not directly attributable to the unit product are indirect cost.

So here the salary paid to workers are directly attributable cost because the time taken to produce one unit in modern industry is fixed and determinable so the wage per unit is also fixed. It means it is a direct cost.

The leather used for a unit product of shoe is also determinable and fixed the product and its costs as well. This means we can easily allocate the cost to the unit shoe so it is also direct cost.

Likewise the cost of machines per unit in modern day industries is also determinable. If the machine life is 100,000 units and its price is $200,000 then the cost attributable to unit product of shoe is $2 per unit.

The electricity cost is not attributable to unit product of shoe as this electricity is used for other operations in the factory and this throws cat among the piegons because it is difficult to find how much a product utilizes electricity because their are number of different product produced in the factory and each utilizes electricity differently. So it is not directly attributable and is an indirect cost.