Direct And Indirect Costs Examples.Costs that are often incurred in business are usually measured in units of money. Everything in business is not free from costs. Cost is one of the most crucial and important elements in business. Matters relating to fees must be recorded in the report for accountability. For business owners you must realize that tracking costs is an important part of the budgeting process.
Direct costs are expenses that can be specifically traced to a product, service or project, while indirect costs are expenses that cannot be easily attributed to a specific cost object.
Here are some examples of direct and indirect costs:
Direct Costs:
- Raw materials and supplies used in production
- Labor costs for employees directly involved in production
- Rent for a manufacturing facility
- Equipment and machinery used in production
- Marketing and advertising expenses for a specific product or service
- Shipping and delivery costs for a specific product
Indirect Costs:
- Rent for an office building used by multiple departments
- Utilities, such as electricity and water, used by the entire company
- Employee benefits, such as health insurance and retirement plans
- Depreciation of company-owned buildings and equipment
- Accounting and legal fees
- Administrative salaries for employees not directly involved in production
It’s important to note that some costs may fall into both categories, depending on the situation. For example, the salary of a supervisor who oversees both direct and indirect employees could be considered both a direct and indirect cost.
Know Direct and Indirect Costs
Companies classify direct or indirect costs based on whether they are used to produce goods or services. The following explanation.
1. Direct Costs
Direct costs refer to costs related to producing goods and can be traced back to certain objects. Usually, direct costs are under the control of department managers and are constant for each unit of production.
Direct costs ( direct costs ) are costs that can be charged directly to the object cost or product. Usually these costs are for paying employees who produce a product, and include the raw materials needed to produce certain goods. In certain contexts, direct costs include employee benefits and programs, equipment, travel and consulting services. Following is an explanation of several types of direct costs.
a. Material Costs
Material costs are costs that include the purchase of materials and materials that are calculated by unit price analysis. Things that must be taken into account in the material costs are the remaining material, the price of loco or franco, the best price, and the method of payment to the supplier .
b. Labor Wage Costs
Labor wage costs are workers’ wage payments that are calculated against unit items and usually already have a standard unit price. In calculating labor costs, it is important to consider things such as the difference between daily or piece rates, work capacity, where workers come from, and take into account applicable labor laws.
c. Equipment Costs
The cost of equipment or equipment is the cost of equipment to carry out construction work. To calculate these costs need to be considered several things such as; the cost of entering and leaving the warehouse, the cost of operating labor, and the operating costs if the equipment is rented, depreciation, repairs, maintenance, and the cost of mobilization if equipment is not leased.
2. Indirect Costs
Usually direct costs are easy to set, but indirect costs are often much easier. Indirect costs ( indirect costs ) are costs that can not be connected and charged directly to the units produced. Generally, indirect costs include electricity and utilities, distribution and sales, building maintenance, and other costs related to the office. This makes indirect costs considered business costs. Following is an explanation of several types of indirect costs.
a. Unforeseen expenses
Unexpected costs are costs that are prepared for events that may or may not occur. For example like, if there is a flood at the project site, of course there will be special costs to overcome them. Unexpected costs are usually estimated to be between 0.5 and 5% of the total project cost. Below are the things that are included in the unexpected costs.
- Subjective uncertainty, in which there are subjective interpretations of something such as the use of certain materials which can be interpreted differently by workers.
- There are errors, for example, such as incomplete work drawings or contractors making mistakes in their work.
- Objective uncertainty, i.e. there is uncertainty whether or not a job is necessary because it is determined by objects beyond human capabilities. For example, the installation of sheet piles for foundations is determined by the level of ground water level.
- Variation in efficiency means that the efficiency of resources such as material, labor and equipment is available or not.
b. Overhead fee
namely additional costs that are not directly related to the project running process but must still be included in the budget for the project to run well. Overheard costs are grouped into 2 types of costs namely;
- Field overhead, related to the costs of field personnel, warehouses, field offices, lighting, transportation, building permits, quality control costs, and others.
- Office overhead, related to office rental costs and facilities, employee salaries, business licenses, bank references, and others.
c. Profit / Benefits
that is, all the results obtained from the implementation of a project. This profit is not the same as salary because in the profits contained business, expertise, coupled with the presence of risk factors.
In some cases, it is quite difficult to be able to classify costs as direct or indirect costs. For example, purchasing raw materials for the production of certain goods is a direct cost. Meanwhile, if the purchase of raw materials in large quantities and goes to other business areas, this is considered as an indirect cost.
