Direct costs, indirect costs and overheads

Overview

Direct costs, difference between a direct cost and a variable cost and cost that is direct but not variable.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Define direct costs.

   Model answer

   Direct costs are costs that can be traced to a specific product, department or job. Timber used to make a table is a direct cost of that table.

2. 2

   Define indirect costs.

   Model answer

   Indirect costs cannot be traced to one particular product or job. Indirect costs are usually described as overheads.

3. 3

   What is an overhead?

   Model answer

   An overhead is a cost of running the business as a whole rather than of making one item. Rent, head office salaries and insurance are common overheads.

4. 4

   Give three examples of overheads in a manufacturing firm.

   Model answer

   Factory rent, the salaries of administrative staff and marketing expenditure are all overheads. None of the three can be attributed to a single unit of output.

5. 5

   Explain the difference between a direct cost and a variable cost.

   Model answer

   A direct cost is defined by whether the cost can be traced to a product. A variable cost is defined by whether the cost changes with output.

6. 6

   Give an example of a cost that is direct but not variable.

   Model answer

   The salary of a supervisor employed on one production line is a direct cost of that line. The salary does not change when output on the line changes.

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