Direct Costs and Indirect Costs

Manufacturing costs may be classified as direct costs and indirect costs on the basis of whether they can be attributed to the production of specific goods, services, departments or not.

Direct Costs

Direct costs can be defined as costs which can be accurately traced to a cost object with little effort. Cost object may be a product, a department, a project, etc. Direct costs typically benefit a single cost object therefore the classification of any cost either as direct or indirect is done by taking the cost object into perspective. A particular cost may be direct cost for one cost object but indirect cost for another cost object.

Most direct costs are variable but this may not always be the case. For example, the salary of a supervisor for a month who has only supervised the construction of a single building is a direct fixed cost incurred on the building.

Examples: Cost of gravel, sand, cement and wages incurred on production of concrete.

Indirect Costs

Costs which cannot be accurately attributed to specific cost objects are called indirect costs. These typically benefit multiple cost objects and it is impracticable to accurately trace them to individual products, activities or departments etc.

Examples: Cost of depreciation, insurance, power, salaries of supervisors incurred in a concrete plant.

Example

Following costs are incurred by a factory on the production of identical cupboards:

1.Laborers' wages2.Synthetic wood
3.Power consumption4.Glass
5.Nails and screws6.Factory insurance
7.Handles, locks and hinges8.Wood
9.Supervisors' salaries10.Factory depreciation
11.Varnish, glue, paints12.Factory manager's salary

Classify the above costs as direct or indirect.

Solution

1.Direct2.Direct
3.Indirect4.Direct
5.Indirect6.Indirect
7.Direct8.Direct
9.Indirect10.Indirect
11.Indirect12.Indirect

Written by Irfanullah Jan