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Cost Accounting

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Direct and Indirect Costs

The expenses on material and labour economically and easily traceable to a product, service or job are considered as direct costs. In the process of manufacture or production of articles, materials are purchased, labourers are employed and the wages are paid to them, certain other expenses are also incurred directly. All of these take an active and direct part in the manufacture of a particular commodity, hence are called direct costs.

The expenses incurred on those items which are not directly chargeable to production are known as indirect costs. For example, in production, salaries of timekeepers, storekeepers, foreman are paid, certain expenses for running the administration are incurred – all of these cannot be conveniently allocated to production and hence are called ‘indirect costs’.

Decision making costs are special purpose costs that are applicable only in the situation in which they are constructed. They have no universal application. They need not tie into routine financial accounts. They do not and should not conform to the accounting rules”. Accounting costs are compiled primarily from financial statements. They have to be altered before they can be used for decision making. Moreover, they are historical costs and show what has happened under an existing set of circumstances. While, decision making costs are future costs, they represent what is expected to happen under an assumed set of conditions. For example, accounting costs may show the cost of product when the operations are manual. While, decision making costs might be calculated to show the costs when the operations are mechanized.