Difference Between Indirect And Direct Cost

An important step in computation and analysis of cost is the classification of costs into different types. Classification helps in better control of the costs and also helps considerably in decision making. Cost can be classified according to the elements. There are three elements of costing such as material, labour and expenses. Total cost of production can be divided into the three elements to find out the contribution of each element in the total cost. Cost can be classified into direct and indirect. Direct costs are the costs which can be directly identified with a specific cost unit or cost centre. Indirect costs are costs which cannot be directly identified with a specific cost unit or cost centre. There is three main type of direct and indirect costs. material is the material which is identifiable with the product. For example cloth for making shirt. Indirect materials cannot be identified with the product. For example cotton. Direct labour can be identified with a given unit of product, for example the wages of

There is four main type of behaviour. First is Fixed Costs it is out of the total cost, some cost remain fixed irrespective of changes in the product volume. These cost are called as fixed costs. Example is insurance, depreciation and director’s salary. Second is Variable costs these are cost that very in direct proportion to changes in the level of activity. If a factory shut down and stop production completely, no variable costs will be incurred. For example include direct materials, direct wages and direct expenses. Third is Semi variable these are costs that contain both fixed and variable costs elements, in other words, the costs are not perfectly fixed. Fourth is Stepped fixed costs these cost are fixed over the range of activity and then rises to a new level as activity change. Once the upper limit of an activity level is reached then a new higher level of fixed cost becomes