Definition

Direct and indirect fixed costs

A profit center may have both direct and indirect fixed costs. Direct fixed costs relate specifically to one center are incurred for the sole benefit of that center. Examples of such costs include the salaries established by the profit center manager for supervisory personnel and the cost of timekeeping department for the center’s employees.

Since these fixed costs can be traced directly to a center, they are also called traceable costs. Most direct fixed costs are controllable by the profit center manager.

In contrast, indirect fixed costs pertain to a company’s overall operating activities and are incurred for the benefit of more than one profit center. Management allocates indirect fixed costs to profit centers on some type of equitable basis. For example, property taxes on a building occupied by more than one center may be allocated on the basis of square feet of floor space used by each center.

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