Classification is the process of grouping costs according to their common characteristics. It is a systematic placement of like items together according to their common characteristics. Direct costs are those costs, which are incurred for, and conveniently identified with a particular cost unit, process or department. Cost of raw materials used and wages of machine operator are common examples of direct costs. To be specific, cost of steel used in manufacturing a machine can be conveniently known. It is, therefore, a direct cost. Similarly, wages paid to a tailor in a readymade garments company for stitching a piece of trouser is a direct cost because it can be easily identified in the cost of a trouser.
Indirect costs are general costs and are incurred for the benefit of a number of cost units, processes or departments. These costs cannot be conveniently identified with a particular cost unit or cost center. Depreciation of machinery, insurance, lighting, power, rent, managerial salaries, materials used in repairs, etc., are common examples of indirect costs. The term direct and indirect should be used in relation to the object of costing. An item of cost may be direct cost in one case and the same may be indirect in another case. It is the nature of business and the cost unit chosen that will determine whether a particular cost is direct or indirect.
Indirect costs are general costs and are incurred for the benefit of a number of cost units, processes or departments. These costs cannot be conveniently identified with a particular cost unit or cost center. Depreciation of machinery, insurance, lighting, power, rent, managerial salaries, materials used in repairs, etc., are common examples of indirect costs. The term direct and indirect should be used in relation to the object of costing. An item of cost may be direct cost in one case and the same may be indirect in another case. It is the nature of business and the cost unit chosen that will determine whether a particular cost is direct or indirect.
