CAT / FIA FMA Syllabus A. The Nature, Source And Purpose Of Management Informa - Product/service costs - Notes ^{4 / 9}

Direct costs

These are costs which can be directly identified with a specific cost unit or cost centre.  

There are 3 main types of direct cost:

1. Direct materials

   - materials used in making and selling a product (or even providing a service)

   e.g. raw material, packing material.

2. Direct labour

   - the specific costs of the workforce used to make a product or provide a service.

3. Direct expenses

   - any expenses which are incurred on a specific product other than direct material cost and direct wages

   e.g. hiring a specific tool to make a specific product.

Indirect costs

These are costs which cannot be directly identified with a specific cost unit or cost centre. 

These costs cannot be easily traced to a specific product.

1. Indirect materials

   Those costs which cannot be traced in the finished product.  

   E.g. oil for machine in a production line.

2. Indirect labour

   All wages not charged directly to a product. 

   These include wages of non-productive personnel in the production department, example supervisor.

3. Indirect expenses

   These are costs not directly charged to production. 

   Examples are rent, rates and insurance of a factory, depreciation, fuel, power, maintenance of plant, machinery and buildings.

Classification by function involves classifying costs as production/manufacturing costs, administration costs or marketing/selling and distribution costs.

These costs have been defined earlier on in this chapter.

Note that expenses that do not fall into one of these classifications might be categorised as general overheads or even listed as a classification of their own

e.g. research and development costs.

Please note that research costs are the costs of searching for new or improved products.

Development costs are the costs incurred between the decision to produce a new or improved product and the commencement of full manufacture of the product.