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Rent of a factory building is a direct cost to the production cost center if the factory building consist of only production department and no other departments.If there are other departments present in the factory building, then the rent will be an indirect cost as it need to be divided among the cost centers. Once we allocated the rent to the production center then we have to further allocate it to the cost units made there. Now rent will be an indirect cost for cost unit and it need to be allocated to the cost units based on overhead absorption rate.
Am i right into these whole thing.
Rent will always be an indirect cost. Direct costs are those that can be measured in each unit, and are usually just materials and labour.
I do suggest that you watch my free lectures (especially on cost classification and behaviour, and on the allocation, apportionment and absorption of overheads) – the lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
actually alng with ot i also refer to study text of kaplan where they define direct cost as
Direct expenses are expenses that can be directly identified with a
specific cost unit or cost centre.So i told that in that sense.another thing i want to know keeping apart the rent, all the overheads are first allocated to the cost centers and then they are further apportioned to the production centers and then we find out overhead absorption rate.
i wanna know not getting into detail to get the logic- it how overall step by step its done?
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