Materials, labor costs and other expenses can be classified as either direct costs or indirect costs.
Direct material costs are the costs of materials that are known to have been used in making and selling a product (or even providing a service). Direct labor costs are the specific costs of the workforce used to make a product or provide a service to an external customer. Direct labor costs are established by measuring the time taken for a job, or the time taken in 'direct production work'. In direct expenses the expenses that have been incurred in full as a direct consequence of making a product or providing a service are included.
Direct material is all material becoming part of the product unless used in negligible amounts or having negligible cost. Direct material costs are charged to the product as a part of the prime cost. Examples can be, component parts, part-finished work and primary packing materials. Component parts, specially purchased for a particular job, order or process. Part-finished work is which is transferred from department 1 to the department 2, becomes finished work of department 1 and a direct material cost in department 2.
Direct wages are all wages paid for labor either as basic hours or as overtime, expended on work on the product itself. Direct wages costs are charged to the product as part of the prime cost. Examples of groups of labor recieving payment as a direct wages are as follows:
(a) workers engaged in altering the condition or composition of the product.
(b) Inspectors, analysts and testers specifically required for such production.
(c) formen, shop clerks and anyone else whose wages are specifically identified.
Two trends may be identified in direct labor costs.
The ratio of direct costs to total product cost is falling as the use of machinery increases, and hence depriciation charges increases. Skilled labor costs and sub-contractors costs are increasing as direct labor costs decrease.
Direct expenses are any expenses which are incurred on a specific product other than direct material cost and direct wages. Direct expenses are charged to the product as part of the prime cost. Examples can be, the cost of special designs, drawings or layouts and the hire tools or equipment for a particular job.
Direct expenses are also referred to as chargeable expenses.