What is the difference of direct costs from indirect?

In the production of goods, the company has 2 types of costs — direct and indirect. What are they? What is the difference of direct costs from indirect?

What are direct costs?

Under direct taken to understand the costs that are directly related to the production of goods and are crucial from the point of view of its cost or have a well-established economic relationship with the object of production.

The main types of direct costs that characterize most types of production:

  • purchase of raw materials, components, which are used for the release of goods by the company;
  • payment of operating costs — utilities software licenses;
  • salary of staff working on factory lines, compensation to the contractors.

to contents ↑What are indirect costs?

Under indirect taken to understand the costs that are secondary from the point of view of cost of production of goods either do not have explicit economic ties with the object of production. Such costs can be:

  • payment of courses to improve the skills of employees of factory lines;
  • the costs of repairs in manufacturing plants, offices;
  • advertising costs, promotion of the manufacturer of the goods;
  • payment of interest on corporate loans;
  • costs on office equipment, communication facilities.

to contents ↑the Difference between direct and indirect costs

The main difference of direct costs from indirect — influence on production costs. Another criterion of difference — the existence of an economic relationship with the objects of production. Thus the same costs may apply in some cases direct, in others indirect, depending on the particular stage of the production process.

For example, the cost for the purchase of equipment for the production of goods will be direct to the manufacturing line (i.e. will have a close economic relationship), but indirect in relation to the cost of production of the relevant goods on this line.

The salary of personnel working on the production, likely to relate to the direct costs. But the remuneration of specialists of other divisions of the company (the accounting or perhaps advertising Department) is indirect costs.

In principle, there is a need for cost classification the company’s direct and indirect?

In practice, this most often is due to the fact that such cost sharing is established in the provisions of Article 318 of the Tax code and is used to determine the terms of transfer costs on account of reduction of tax base.

Those types of expenses that the tax code refers to as direct, can be reflected in tax statements for the current period only as the sale of goods. Indirect costs allowable recorded in the relevant documents in full. But if the firm provides services and is not engaged in the production of goods, both costs can be reflected in the same period. Due to this entrepreneur are able to use components of their sum to reduce the tax base at the same time.

Defining the difference between direct and indirect costs, as well as considering what its practical significance will record the findings in the table.

to content ↑Comparative table

Direct costs
Indirect costs

What is common between them?

The same cost can be direct for some sites of production and indirect for other

What is the difference between them?

Are costs that have a well-established economic links with one or another production process
Are costs that do not have explicit economic ties with manufacturing processes

To a certain extent affect the cost of produced goods
Limited influence on the Prime cost of produced goods

Can be taken to reduce the tax base only as realization of produced goods
Can be taken to reduce the tax base within the reporting period without any restrictions

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