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Last edited 19 Jun 2019
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 direct cost of manufacturing a steel padlock is £1, made up of:
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.
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