With relation to the products, the costs can be direct or indirect.
Direct Costs
Refer to the expenses in respect of materials, labor, general factory expenses applied directly to the product.
These costs are so called because their amounts and proportion in relation to the product can be identified easily. Thus, all the expenses that directly impact the manufacture of a product are considered direct costs.
Examples:
- Raw material;
- Secondary material;
- Labor.
Indirect Costs
Refer to expenses with materials, labor and general factory expense applied indirectly to the product.
These expenses are so called as their amounts and proportion of in relation to the product cannot be identified.
Classification of expenses as Indirect Costs is done both for those that cannot be identified clearly and objectively with the product and for those that, even integrating the product (as happens with certain secondary materials), due to the small value they represent in the total cost, are not worth calculation to be considered as direct cost.
The difficulty in identifying these expenses in relation to the product is because the referred expenses are used in the manufacture of various products at the same time.
Examples:
- Electricity;
- Factory rent;
- Salaries and social contributions for sectional heads.
If it is difficult to identify the value of indirect costs in relation to each product, how can we know the value of these cost that must be attributed to each of the manufactured goods?
To know the value of indirect costs to be attributed to each product, it is necessary to establish some criterion, which will be estimated or decided by the company.
The distribution of indirect costs to the products is called apportionment and the criterion for this distribution is called apportionment base.
See Also
Refer to topic Off-line Apportionments.
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