Any amount of expenditure incurred on production of a particular article, product or activity, is called the cost. The cost of a product or service may be divided in to two parts i.e. direct cost or indirect cost.

Direct cost:- Direct cost includes the cost of material and other direct expenses relating to the production or services to be rendered to the customers. It is known as flexible cost also. When the expenses are increased or decreased as per the quantity of the product then we shall call it as direct cost.

For example:- in case of manufacturing of a product, the amount spent on raw material, wages relating to product, fuel, cartage of purchases etc. are the part of direct cost because all these expenses will increase or decrease as the production will increase or decrease.

Illustration:- M/s ABC Company manufactures Rubber Tyre. They will need quantity of rubber as per the quantity of tyres to be produced because rubber is the main material which is used to manufacture a tyre. Therefore, in this example, direct cost is rubber.

Indirect Cost:- Indirect cost has no direct relation with the quantity of the product. All the indirect expenses are called as indirect cost. Indirect cost is also known as fixed cost. For example:- the salary of administration staff and other administration expenditure are not affected with the quantity of the product. Therefore, we call these expenses as indirect cost.

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