Incentive to drivers
This query is : Resolved
29 July 2013
Dear Experts,
Greetings of the day!
Please guide me on the following matter-
A Ltd. pays incentives to the drivers for timely procuremnet of the raw material and debits it to the 'Other Misc. Exp.' under indirect expenses head.
But in my view such an expense is of Direct Nature and should be debited to Manufacturing a/c.
is my opinion is right???
Greetings of the day!
Please guide me on the following matter-
A Ltd. pays incentives to the drivers for timely procuremnet of the raw material and debits it to the 'Other Misc. Exp.' under indirect expenses head.
But in my view such an expense is of Direct Nature and should be debited to Manufacturing a/c.
is my opinion is right???
29 July 2013
yes it should be include in driver salary
29 July 2013
Sir thanks for your reply but I think some clarification is needed in my query.
Drivers are not employed by the co. they may be the employees of transporters'. Company just contracts the transporter. drivers have no relationship with the company.
I want to know whether any such amount paid to the drivers of transporters' for bringing the raw material at the earliest, is of direct nature considering it as similar to Freight on raw material or should it be treated as indirect expense?
Drivers are not employed by the co. they may be the employees of transporters'. Company just contracts the transporter. drivers have no relationship with the company.
I want to know whether any such amount paid to the drivers of transporters' for bringing the raw material at the earliest, is of direct nature considering it as similar to Freight on raw material or should it be treated as indirect expense?
29 July 2024
When it comes to accounting for incentives paid to drivers who are employed by a transport company (not directly by your company), there are several key considerations to determine whether these expenses should be classified as direct or indirect.
### **Classification of Incentives Paid to Drivers**
**1. Nature of the Expense**
- **Direct Expense:** Generally, a direct expense is one that can be directly attributed to the production of goods or services. For manufacturing companies, direct expenses typically include costs like raw materials, direct labor, and direct overheads.
- **Indirect Expense:** Indirect expenses are those that are not directly attributable to a specific product or service but are necessary for the overall operation of the business. These include administrative costs, utilities, and other general overheads.
**2. Incentives to Drivers**
- **Contractual Relationship:** Since the drivers are employees of the transport company and not directly employed by your company, the payments made by you to incentivize these drivers are essentially payments made to a third party (the transport company) to expedite their services.
- **Nature of Incentive Payment:** The incentive is intended to encourage timely delivery of raw materials, which directly impacts the manufacturing process. In essence, it facilitates the procurement of raw materials in a timely manner, similar to how freight expenses do.
**3. Treatment in Accounts**
Given that the incentives are paid to expedite the delivery of raw materials, and considering that they are closely tied to the cost of procuring these materials, your view that they should be treated as a direct expense is reasonable.
**4. Accounting Treatment**
- **Direct Cost:** Since the incentive payment is directly related to the timely procurement of raw materials, it can be classified as a direct cost related to manufacturing. In this context, it would be appropriate to debit these expenses to the Manufacturing Account, as they are integral to the procurement process and impact production efficiency.
- **Indirect Expense:** If you consider these payments as part of general expenses related to procurement but not directly linked to the production process, they could be classified under indirect expenses. However, this is less typical.
### **Summary of Key Points:**
1. **Direct Nature:** Incentives paid to drivers of a transport company, aimed at ensuring timely delivery of raw materials, can be considered a direct cost because they affect the procurement process directly.
2. **Accounting Treatment:** It is appropriate to debit such expenses to the Manufacturing Account rather than treating them as an indirect expense under Miscellaneous Expenses.
3. **Justification:** The key justification is the direct impact on the procurement process and, consequently, on the production efficiency. If these incentives ensure that raw materials are delivered on time, they are closely linked to the production process and should be treated accordingly.
### **Conclusion:**
Your opinion that such incentives should be debited to the Manufacturing Account is valid. This treatment reflects the direct relationship between the incentive payment and the procurement of raw materials necessary for manufacturing.
### **Classification of Incentives Paid to Drivers**
**1. Nature of the Expense**
- **Direct Expense:** Generally, a direct expense is one that can be directly attributed to the production of goods or services. For manufacturing companies, direct expenses typically include costs like raw materials, direct labor, and direct overheads.
- **Indirect Expense:** Indirect expenses are those that are not directly attributable to a specific product or service but are necessary for the overall operation of the business. These include administrative costs, utilities, and other general overheads.
**2. Incentives to Drivers**
- **Contractual Relationship:** Since the drivers are employees of the transport company and not directly employed by your company, the payments made by you to incentivize these drivers are essentially payments made to a third party (the transport company) to expedite their services.
- **Nature of Incentive Payment:** The incentive is intended to encourage timely delivery of raw materials, which directly impacts the manufacturing process. In essence, it facilitates the procurement of raw materials in a timely manner, similar to how freight expenses do.
**3. Treatment in Accounts**
Given that the incentives are paid to expedite the delivery of raw materials, and considering that they are closely tied to the cost of procuring these materials, your view that they should be treated as a direct expense is reasonable.
**4. Accounting Treatment**
- **Direct Cost:** Since the incentive payment is directly related to the timely procurement of raw materials, it can be classified as a direct cost related to manufacturing. In this context, it would be appropriate to debit these expenses to the Manufacturing Account, as they are integral to the procurement process and impact production efficiency.
- **Indirect Expense:** If you consider these payments as part of general expenses related to procurement but not directly linked to the production process, they could be classified under indirect expenses. However, this is less typical.
### **Summary of Key Points:**
1. **Direct Nature:** Incentives paid to drivers of a transport company, aimed at ensuring timely delivery of raw materials, can be considered a direct cost because they affect the procurement process directly.
2. **Accounting Treatment:** It is appropriate to debit such expenses to the Manufacturing Account rather than treating them as an indirect expense under Miscellaneous Expenses.
3. **Justification:** The key justification is the direct impact on the procurement process and, consequently, on the production efficiency. If these incentives ensure that raw materials are delivered on time, they are closely linked to the production process and should be treated accordingly.
### **Conclusion:**
Your opinion that such incentives should be debited to the Manufacturing Account is valid. This treatment reflects the direct relationship between the incentive payment and the procurement of raw materials necessary for manufacturing.
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