Direct and indirect costs

What is a direct cost?

Direct cost gets its name because it is directly related to the main business process.

These costs are easily identified in products or services, for example, by the price that a merchant buys a certain product to put it up for sale.

Other examples of direct costs to the business are the costs of:

  • Raw Materials;
  • Direct work (workers in an industry);
  • Packaging materials.

What is an indirect cost?

This cost, unlike the previous one, is not directly related to the main activities of the company and presents a greater difficulty to identify them.

A common example of indirect costs is in the electrical energy that an industry uses, since it turns out to be a production cost, but a medium one.

Other examples of indirect costs appear in:

  • Materials not linked to production (from a company office, for example);
  • Indirect work (cleaning or security personnel, for example);
  • Contracted insurance;
  • Maintenance expenses;
  • Depreciation or amortization costs.

Relationship with fixed and variable costs.

Direct and indirect costs can also be divided into two different types of costs, known as fixed costs and variable costs.

Fixed costs are those that are constant and independent of how much is produced, while variable costs are named because they vary with the amount that is produced.

Direct fixed cost

Fixed costs are direct when their production is constant, but only those that are really part of the main activity are considered. The main example is the wages of the workers, since they have a direct relation with the production, but they are fixed every month.

Indirect fixed cost

Indirect fixed costs are also constant, but this time they are not tied to the core business, such as the cost of renting all of the company’s space.

Direct variable cost

These are the costs that are more related to production, since they vary with the quantity produced and in direct relation, such as, for example, the costs with raw materials.

Indirect variable cost

These costs increase or decrease with production, but indirectly to the final product. One of the best-known examples is the company’s electricity costs.