Direct costs are those cost that are directly related to production of the goods. There are three types of direct costs –
1. Direct material cost – It is related to those raw materials which are required for the production of the good during manufacturing. For example direct material for making steel is iron ore or for ice cream it will be milk.
2 Direct labor – It is related to the wages that is paid to the workers who are involved in the production process. For example labor of machine operators can be called as direct labor.
3. Direct Expenses – These all are the expenses which are directly attributable or which can be assigned to a product. For example insurance charge payable for raw materials or taking on rent special plant or machinery for production of a good.
Indirect costs are those costs which cannot be directly assigned to a single product rather it has to be assigned in some proportion to all products. It includes indirect material cost, example of which is consumable stores, grease that is required for various machineries, indirect labor who do not engage in the production of goods directly, for example salary of supervisors, store keepers etc…. The last is indirect expenses, the example of which is depreciation, power, taxes, rent etc….