AAT Applied Management Accounting (AMAC) Level 4 Practice Exam

Direct costs are expenses that can be directly traced to a specific product, project, or activity. In this context, the correct answer is raw materials used in production because these costs are directly associated with the manufacturing of products. Each unit of product produced typically requires a specific amount of raw materials, making costs for these materials directly attributable to production.

On the other hand, administrative salaries, utility expenses, and advertising costs are considered indirect costs. Administrative salaries are related to overall management functions and cannot be directly linked to any single product. Utility expenses are generally overhead costs incurred for all operations and cannot be directly apportioned to a particular product or service. Advertising costs, while important for promoting products, are not directly tied to the production of any specific item and are viewed as a general business expenditure. This is why raw materials are classified as direct costs, as they have a direct and quantifiable relationship to the production process.