Direct Costs
Direct costs are defined as the costs which are directly linked to a product or service manufactured by a company. These costs are easily traceable to their cost objects, which can include things like goods, services, projects or departments. The direct costs include direct labour, materials, manufacturing supplies as well as the wages or salaries that are tied to the production. The direct costs can also be fixed like the rent payments, which are directly linked to the production facility. Also there are salaries of supervisors or managers which might also get included in the direct costs, particularly if they are tied to one specific project. Typically, direct fixed costs don’t vary, meaning they don’t fluctuate with the number of units produced. The direct costs are those expenses which can be tied directly to the production of any commodity and can include direct labour and direct material costs. Direct costs can be both fixed costs as well as variable costs.
Variable Costs
Variable costs are defined as the costs which vary as the actual production of any product or service declines or rises. Unlike the direct costs, the variable costs totally depend on the production volume of a company during a period of time. When the production and final output of a company increases then it leads to an increase in the variable costs as well. Similarly, when there is a decline in the production and final output level, the variable costs also witness a fall. For example, the costs of packaging that are associated with any product will be a variable cost as it will increase with an increase in the sales. The raw materials that are used for making any product would also be a part of variable costs as the materials cost would fall or rise, depending solely on the sales volume of a product. The raw materials will also be a part of variable costs. These costs vary with the level of the production output and can include items like raw materials or machinery supplies. They can also include indirect costs like electricity for the plant as it cannot be tied to one single product.
Difference between Direct Costs and Variable Costs
There are some major areas of difference between direct costs and variable costs and we shall focus on them below to get a better understanding of the topic:
Direct costs are costs tied to any product or service which is produced by a company. Direct costs can be traced to their cost objects. | Variable costs are costs that vary as the production of any commodity or service increases or decreases. |
The direct costs do not depend on the production volume of a company. | The variable costs depend on the production volume of a company. |
The direct costs do not necessarily need to be related to variable costs | The variable costs fall within the category of direct costs. |
The direct costs have a wider scope when compared to the variable costs. | The variable costs have a narrower scope when compared to the direct costs. |
Conclusion
There are a number of points of difference between direct costs and variable costs. However, both of them play a crucial role in the final selling price of a product. With the advancement of technology and logistics, a firm must look to reduce both their direct and variable costs, to make sure that they can have more enhanced margins for their products and services.
Frequently Asked Questions
Q1
What are some of the main differences between direct costs and indirect costs?
Some of the main differences between direct costs and indirect costs are mentioned below:
- Direct costs can be identified easily when compared to indirect costs
- Direct costs are expended on the particular cost objects while indirect costs are expended on multiple cost objects
- The total of all the direct costs are known as prime costs while the total of all the indirect costs are known as overheads
- Examples of direct costs include sales commission, raw material and transportation costs, etc. while examples of indirect costs include office, rent, accounting and administrative expenses
Q2
Is labour a fixed cost or a variable cost?
Although the labour costs are typically of a fixed nature, some part of it can be categorised as variable. For example, the piecework labour, that is the labour cost which is tied to the total number of pieces worked on or produced by each employee can be a part of the variable costs.
Also See:
- How to Calculate Total Variable Cost
- Factor Cost Basic Prices and Market Prices
- Difference Between Demand Pull and Cost Push Inflation
- Fixed Cost Vs Variable Cost
- Difference Between Standard Costing and Budgetary Control
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