Different Between Indirect and Direct Costs

When a product is manufactured, certain costs can be easily traced back to the individual products that you make. These expensed are chosen straight costs. Certain costs, on the other hand, cannot be traced so easily dorsum to an individual production. These expenses are chosen indirect costs. Both are of import for running a concern and a better agreement of the 2 is crucial for tracking business organization expenses.


What is a Direct Cost?

Direct cost, equally the name suggests, is a cost that can exist directly connected to the manufacturing or production of sure appurtenances or services. Direct costs tin be easily traced back to the production of a specific production or a service beingness offered. Material and labor costs are good examples of direct costs.

Let’s say you manufacture notebooks. To make notebooks, you need white paper sheets, cover pages, ink, industrial gum, and bounden materials. These are all considered direct material costs, because they tin be straight tied to that specific product. These are raw materials that are mandatorily required to industry notebooks. Directly labor is the toll of paying workers to brand these products. If one worker takes iii hours to make a production at $12 per hour, and then the direct labor cost equals $36.


What is an Indirect Toll?

Consider the same instance of notebooks. Yous know the direct costs involved in manufacturing a notebook. But direct costs are not the just expenses involved. There are other costs involved that cannot be directly tied back to the production of notebooks. These include supplies, utilities, equipment rental, electricity and phone, and then on. These overhead costs which extend beyond the expenses y’all incur manufacturing a certain product, or in this case notebooks, are called indirect costs.

Popular:   Difference Between Housing Prices and Consumer Price Index

Unlike direct costs, they cannot be traced back to specific cost objects. It represents the cost of doing business that is not readily identified with a particular product or service. So, instead they have to be allocated. Indirect costs may exist either fixed or variable. You typically allocate costs by assigning a toll per unit, which attaches all of the indirect costs to your products or services.

Difference between Indirect and Straight Costs

Meaning

 – Straight costs are costs can be easily traced back to the product of a specific product or a service being offered. Directly costs fall into two categories: direct materials and straight labor. Direct materials are raw materials that can be tied straight to the manufactured production. Straight labor is the toll of paying the workers to make the products. Indirect costs, on the other hand, are costs which cannot be easily tied to individual manufactured products. Indirect costs are sometimes referred to as overhead costs.

Expenses

– Direct costs are expenses involved with manufacturing a product and include manufacturing supplies, raw materials, equipment costs, labor costs, and other production costs. Materials and labor costs are skillful examples of straight costs. Indirect costs are expenses that do not directly related to the manufacturing of the product. Indirect costs include utilities, office supplies, electricity, telephone, property and other taxes, insurance, and depreciation of factories and equipment.

Example

 – Say you manufacture cotton fiber gloves, for which you demand cotton, yarn and leather. The materials can be traced directly to the gloves; for example, you can take a glove apart and come across exactly what materials were used to brand a glove. In this case, cotton fiber, yarn and leather are considered direct material costs, because they can exist directly connected to the manufacturing of the gloves. Only non all costs are direct. Assume yous charter the building where you lot make the gloves. You obviously can’t connect the cost of the charter directly to whatsoever particular pair of gloves. This comes in indirect costs.

Popular:   Difference Between Consumer Price Index and Inflation

Indirect vs. Directly Cost: Comparison Chart


Summary

Both are important price accounting terms and can be confusing sometimes. Directly costs are costs that y’all tin easily trace to a detail production or service. Raw materials and labor costs are the most common examples of straight costs. Indirect costs, on the other hand, are costs that cannot be traced directly to a specific product or service. Instead, indirect costs are allocated and they are also referred to equally overhead costs. Yous typically classify costs by assigning a cost per unit. The per unit rate links all of the indirect costs to your products.

What are the examples of direct and indirect price?

Raw materials and labor costs are expert examples of direct costs. Indirect costs include utilities, function supplies, electricity, telephone, belongings and other taxes, insurance, and depreciation of factories and equipment.

What is the divergence between straight cost and variable cost?

Straight costs and variable costs are both similar in nature and they both are involved in production. Direct costs are often variable costs, but they can also be stock-still. They tin can be directly tied to a product or service. Variable toll, on the other manus, may vary depending on the level of production output.

How is directly cost calculated?

Direct cost is the sum total of the directly materials costs involved in the manufacturing of a detail production and the direct labor costs.

Is packaging a direct or indirect cost?

The packaging costs come under the direct variable price category considering these costs can vary depending on the number of products manufactured.

  • Author
  • Contempo Posts

Loading…

Email This Post Email This Post : If you like this article or our site. Please spread the word. Share information technology with your friends/family.

Source: http://www.differencebetween.net/business/different-between-indirect-and-direct-costs/