Direct and indirect Costs
The term direct costs mean the costs involved directly in the making of the product or the service. The obvious costs you might include are the raw materials and direct labour. For example if you estimate there is in total £7 of direct materials, and you pay the labour £10 an hour and they finish in half an hour, your direct labour would be £5. So to produce this item in total it will be £5 plus £7 which the total direct cost will be £12. However there would be many more costs involved in the manufacturing process. The cost of power to run the equipment, the rent of the factory, the heat and lighting, the wages of all the staff and managers involved, the depreciation of the machinery and finally the advertising costs and other expenses the firm has to pay these are all indirect costs. Many direct costs will have direct expenses such as the motive power to operate the machinery, packaging costs and VAT. The costs calculated may vary according to the nature of the product. Although the company may use electricity for different purposes there isn’t a fixed cost for making one product so the general electricity will be indirect. The majority of expenses wouldn’t be classed as direct because they can vary in price. When a firm values its stock at the end of the year, in order to complete the final accounts, it will have to estimate three types of stock it holds, raw materials, work in progress and finished goods. The stocktake, to value the closing stock for the purpose of drawing up final accounts, is done on one day during the year. A person or group of people would walk around the factory and count how much unused materials there are there and value them, this is the raw material figure. They would also count how many finished products are available to sell, this would be used to value the finished products the company has. However, as well