[Divachic26]

How do direct costs and indirect costs differ?

[morgaine300]

Direct costs are the ones that are charged directly into production. They are usually things that can easily be determined to belong to a specific job or product. Indirect costs are usually ones that are harder to trace back to a specific job or product, or it's just not worth the time to do so.

It's easier to use some examples. Let's say you make lawnmowers. The main pieces of that lawnmower would be the direct costs, such as the housing, the motor, the four wheels, the handle, the blades, etc. You could easily know that each of those items goes into one lawnmower and account for it directly. The indirect things would be like screws, glue, oil, etc. Picture that you have 100 lawnmowers being made, and each of those direct materials is sitting right there at the place where the lawnmower is being assembled. But off to the side somewhere is just this big bin of screws. So everyone making a lawnmover just grabs a big handful of screws and takes it to their little work area. No one would want to bother figuring out how many screws are going to each lawnmower. Or how much oil is going to each lawnmower, etc. Even if they know, it's certainly not worth messing with dividing the cost of thousands of screws purchased down into the cost of one lawnmower.

As a general rule, hardware (screws, bolts, etc), paint, oil and the like are going to be indirect materials. The "main" pieces of a product would be the direct materials. You also have to keep in mind that this can be opinionated. Some items are fairly obvious and some items are ambiguous. (Even financial accounting has differences of opinion and things that are not always cut and dry, but cost accounting is even more so like this.)

Direct and indirect labor is a little easier to figure out. Generally, the people working directly on the product, the assembly line people, are the direct. A lot of times these are hourly people. The indirect labor is like the supervisors, quality control people, etc, many times those on salary. A supervisor cannot really be tracked to a particular job or product. They're just there.

All of the direct costs will be charged directly into production, to either the job or the product line. Indirect costs are put into an overhead account, and then later it's divided up among all jobs or products at one time, so that it's kind of done all in one step rather than tracking each individual item. How that's done is another subject.