When considering a new supply source for a product, a procurement professional reviews supplier quotations before negotiation. Which of the following is a direct cost in the supplier’s quotation?
Direct costs are those directly attributable to the production of a unit — such as raw materials, components, and direct labour. Here, the metal used is a clear direct cost, as it varies with production output. Rent, insurance, and sales wages are indirect (overhead) costs, which must be allocated across products. Understanding this distinction is vital in negotiations, since direct costs are easier to challenge for efficiency gains, while indirect allocations may be arbitrary. Buyers with clear knowledge of cost breakdowns can negotiate more effectively, avoiding inflated pricing.
[Reference: CIPS L4M5 (2nd ed.), LO 2.2 – Cost analysis: direct vs indirect costs in supplier quotations., , , ]
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