Direct Cost vs Indirect Cost Differences
If we look at the cost sheet, we will see that there are two types of costs that stand out. The first is Direct cost and the next is indirect cost. Direct Cost and Indirect Cost are important for running a business.
Direct costs are costs that can be identified easily as per the expenditure on cost object. For example, if we pick how much expenditure a business has had on purchasing the raw materials inventory, we will be able directly point out.
In the case of indirect costs, the challenge is that we can’t identify the costs as per the cost object. For example, if we try to understand how much rent is given for sitting of the machinery in a place, we won’t be able to do it because the rent is paid for the entire space, not for a particular place.
In this article, we will try to understand the comparative analysis between Direct cost vs Indirect Cost
Let’s get started.
Direct Cost vs Indirect Cost Infographics
Direct costs and indirect costs are both important. But if we look inherently, we will see that there are many differences between these two. Let’s have a look at the main differences one by one.
Direct Cost vs Indirect Cost – Key differences
The key differences between direct cost and indirect cost are as follows –
- Direct cost can be identified easily as per the cost object. Indirect cost can’t be identified easily.
- Direct cost is incurred on specific projects, units, departments, and objectives. Indirect cost, on the other hand, is incurred to provide multiple benefits to the business at large.
- Direct cost is also labeled as the variable cost since it changes as per the unit consumed/produced. Indirect cost, on the other hand, is labeled as the fixed cost since it doesn’t change with unit consumed/produced.
- As you have seen, the aggregate of direct costs is called the prime costs in the cost sheet. The aggregate of indirect costs, on the other hand, is called the overheads in the cost sheet.
- As an example, we can say that direct costs are the expenses incurred for the raw materials used in the production process. Since one can directly attribute how much cost is expended per unit of raw material, we call it direct cost. On the other hand, advertisement expense is indirect cost since it benefits the organization as a whole.
Direct Cost vs Indirect Cost (Comparison Table)
|Basis for Comparison – Direct cost vs indirect cost||Direct Cost||Indirect Cost|
|1. Meaning||Direct costs are costs that can be easily identified as per the cost objects.||Indirect costs are costs that aren’t easy to identify as per the cost objects.|
|2. Expended on||Particular cost objects.||Multiple cost objects.|
|3. Can be identified as||Direct costs can also be called as variable costs.||Indirect costs can also be called as fixed costs.|
|4. Place in the cost sheet||Direct costs is computed at the beginning of the cost sheet.||Indirect costs are ascertained after computing the direct costs.|
|5. Aggregate in cost sheet||Aggregate of direct costs in the cost sheet is called prime cost.||The aggregate of indirect costs in the cost sheet is called overhead cost.|
|6. Can be attributable?||Yes.||No.|
|7. Example||Example of direct cost is the cost attributable to direct material, direct labour, and direct wages.||Example of indirect cost is rent, advertisement etc.|
Understanding direct costs vs indirect costs is important. Because if as a business, you don’t know how to allocate your costs and how to attribute them properly, you won’t be able to find out the profit per unit after selling your products/services.
As you already know, direct costs are identifiable. The challenge the business faces is with indirect costs.
For unidentifiable costs, the business can see how much they can expend on long term basis and then they can measure the benefit.
It is similar with understanding fixed costs and variable costs. If you understand how they work, it would be easier for you as a business to use them for your own advantage.
This has a been a guide to the top differences between direct costs vs indirect costs. Here we also discuss the direct costs and indirect costs differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in Accounting –
- Explicit Cost
- Implicit Cost
- Cost Accounting vs Management Accounting
- Cost Accounting vs Financial Accounting
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