Direct and Indirect Costs
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Direct and Indirect Costs

Direct and Indirect Costs Material, labor and other expenses which are directly or easily traceable to a product, service or job are known as direct costs. In the production of an article, materials are purchased, wages are paid to workers and certain other expenses are incurred directly. All these take an active and direct part in the manufacture of a product and are, therefore, called direct costs. These costs have a direct relationship with a product, process or department of the firm.

Direct and Indirect Costs

Material, labor and other expenses which are directly or easily traceable to a product, service or job are known as direct costs. In the production of an article, materials are purchased, wages are paid to workers and certain other expenses are incurred directly. All these take an active and direct part in the manufacture of a product and are, therefore, called direct costs. These costs have a direct relationship with a product, process or department of the firm. These costs can be directly and definitely identified with a particular unit of output. For example the cost of an engine and coaches can be directly identified with a particular train.

Direct costs include :

i) Direct material : All material which becomes an integral part of the finished product and which can be conveniently assigned to specific physical units of the finished product is known as direct material or process material. Wood used in making furniture, sugarcane in a sugar mill, raw cotton in a textile mill, crude oil in making diesel are examples of direct material,

ii) Direct labor: Labor which takes an active and direct part in the production of a particular commodity is known as direct labor. Direct labor costs are specifically and conveniently traceable to specific products. Direct labor is also known as productive or operating labor. Wages paid to carpenters in a furniture workshop are direct labor,

iii) Direct expenses: These are the expenses which can be directly, conveniently and wholly allocated to specific cost centers or cost units. Rent paid for hire of a special machine required for a particular contract, cost of defective work incurred in connection with a particular job, fees paid to the architect of a building, etc., are examples of direct expenses. These are also known as chargeable expenses.

Indirect costs refer to the expenses incurred on those items which are not directly chargeable to production; Salaries of timekeeper, storekeeper, and foremen are examples of indirect costs. In the running of a particular train, cost of railway station and railway staff are indirect costs. Indirect cost is incurred for the concern as a whole rather than for a particular product.

Indirect costs include:

(i) Indirect material: All material which is used for ancillary purposes and which cannot be conveniently assigned to specific physical units is known as indirect material. Consumable stores, oil lubricants and cotton waste, printing and stationery material, nails, glue and polish used in making furniture, etc., are a few examples of indirect material. Such material may be used in the factory, office or selling and distribution division.

(ii) ) Indirect labor : Labor employed for the purpose of carrying out tasks incidental to goods produced or services provided is indirect labor. Such labor does not alter the composition, construction or condition of the product. It cannot be easily traced to specific units of output. Wages of storekeepers, timekeepers and watchmen, salesmen's salaries, directors' fees, etc., are examples of indirect labor costs.

(iii) Indirect expenses : These are the expenses which cannot be directly, conveniently and wholly traced to a particular product. Rent, lighting, insurance charges, depreciation, etc., are examples of indirect expenses.

 

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Comments (3)

Excellent and very useful article....thanks for sharing

RAJA

thanks

very clear and easy to understand,great job.
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