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Direct Cost
Indirect Cost
DIRECT COST
The cost can easily be traced to a product, department, or
project
Direct Material
Direct Labor
Direct Expenses
DIRECT MATERIAL
Direct materials are those which can be specifically traced to a unit of
production.
For Example,
Tracing wood into furniture
Timber used to construct a house.
Steel included in an automobile.
Circuit board included in a radio.
Fabric used to assemble clothing.
Plastic used to make Toys.
For Example,
Assembly line workers,
Production supervisors,
Quality control inspectors.
For Example,
Royalties
PRIME COST
Direct Material x
Direct labour x
Direct expenses x
Prime cost x
INDIRECT COST
The cost cannot easily be traced to a product, department, or
project
For example, with Ford, the direct costs associated with each
vehicle include tires and steel. However, the electricity used to
power the plant is considered an indirect cost because the
electricity is used for all the products made in the plant. No
one product can be traced back to the electric bill.
TYPES OF INDIRECT COST
Indirect Material
Indirect Labor
Indirect Expenses
INDIRECT MATERIAL
Indirect materials are those which cannot be specifically traced to a
unit of production.
For Example,
Oil and lubricants for machinery.
Cleaning supplies.
Disposable safety equipment.
Disposable tools.
Fittings and fasteners.
Glue.
Tape used in Packaging
INDIRECT LABOUR
Indirect labour means labour who are not directly involved in making
units.
For Example,
Maintenance workers
Factory Manager
supervisors,
Security guards in the factory,
Quality assurance workers in the factory
INDIRECT EXPENSES
For Example,
Heating and Lighting for factory
PRODUCTION OVERHEADS
Indirect Material x
Indirect labour x
Indirect expenses x
Production Overheads x
PRODUCTION OVERHEADS
Direct Material x
Direct labour x
Direct expenses x
Prime cost x
Indirect Material x
Indirect labour x
Indirect expenses x
Production Overheads x
Production Cost x
NON PRODUCTION OVERHEADS
Businesses also have non-production overheads. These are costs which
have nothing to do with production such as
The accounting department,
advertising,
distribution,
head office costs.
TOTAL COST
Prime cost = direct material + direct labour + direct expenses
Factory cost = prime cost + production overheads
Total cost = factory cost + non-production overheads
EXAMPLE
Which item would most likely be treated as an indirect cost by a
furniture manufacturer?
A Leather
B Factory rent