Direct cost
Direct costs for goods and services are those costs incurred directly for production and include items such as raw materials, labour, equipment, software and power costs. Direct costs can be traced and attributed to a cost ‘object’ which may be a product, department, cost centre or project.
Indirect costs (sometimes called ‘overheads’) are those necessary to keep a production facility in business and include rent, insurance, advertising and marketing which, although they may be included in the cost of the product or service, they are still indirect costs because they do not vary directly with the volume of goods/services produced and are not easily attributable to a particular process or project.
The amount added to a product’s unit costs by indirect costs will vary according to production levels, as in the following illustration:
The direct cost of manufacturing a steel padlock is £1, made up of:
The factory’s monthly indirect costs (rent, equipment, marketing etc) = £50,000
In January, the factory makes 100,000 padlocks, so the indirect cost element attributed to each unit is £0.50p.
In February, the factory makes 200,000 padlocks, so the indirect cost element attributed to each unit is £0.25p.
But in both months, the indirect costs have not changed, the only variable is in how much indirect cost is incurred by each unit.
So, indirect costs do not vary directly with production levels, whereas direct costs remain dependent on production levels and will vary when production is increased or decreased.
NB Cost prediction, Professional Statement, 1st edition, published in November 2020 by the Royal Institution of Chartered Surveyors (RICS), defines direct costs as: ‘Costs incurred on labour, material, plant and equipment, etc., i.e. costs that are directly accountable to the project.’
[edit] Related articles on Designing Buildings
Featured articles and news
The general election and the construction industry
As PM, Rishi Sunak announces July 4 date for an election.
Tackling the lack of knowledge or confidence in heat pumps
The CICV Green Home Festival part of the Edinburgh Fringe.
Home improvements swapped for green energy upgrades
As applications down since and desire to reduce bills up.
Eco apprenticeships continue help grow green workforce
A year after being recognised at the King's coronation.
The Use of Natural Insulation Materials in Retrofit
New paper from STBA with support from SDF.
National Retrofit Hub in partnership with InstallerSHOW.
Permitted development rights for agricultural buildings
The changes coming into effect as of May 21, 2024.
Biodiversity and the built environment digital series
The nature of building, with CIOB and CWP.
A call for prevention and sensitive re-use.
Risks to the long-term effectiveness of the BNG scheme
National Audit Office publish review of Biodiversity Net Gain.
The CIAT principal designer register
Providing assurance and verification of the capability and competence of registered ATs.
Building Safety recommendations and Northern Ireland
The NI roadmap to improving safety in high rise residential.
Specifying rendered external wall insulation for fire safety
How to interrogate the evidence provided to the specifier.
The benefits of writing articles for your organisation
How to create a profile for your organisation and publish for free.
Scottish Government action to reach net-zero targets
Retrofit expert group highlight critical actions needed.
A forward thinking, inclusive global community of members.
Comments
[edit] To make a comment about this article, or to suggest changes, click 'Add a comment' above. Separate your comments from any existing comments by inserting a horizontal line.