Question

Preston Company has three divisions. The company should consider a cost to be a direct cost of a division if:

a. It meets guidelines imposed by generally accepted accounting principles.
b. It can be traced to a division in a cost-effective manner.
c. It is a variable cost.
d. It can be allocated to a division.

Answer 1

Answer:

b. it can be traced to a division in a cost effective manner.

Explanation:

Direct costs are those costs which can be directly attributable to a product, activity or a department. For example, direct material or direct labor are direct costs.

These refer to those costs which are incurred specifically for a product, service or incurred for a particular department. Usually such costs are variable i.e they usually vary with the level of production.

Direct costs can be specifically traced so they need not be allocated to any product or a department.