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  Classification According to Nature

Introduction to Classification according to nature

According to this classification, costs can be categorized into Direct and Indirect. Direct costs are the costs that are identifiable along with the product unit or cost center when indirect costs are not identifiable along with the product unit or cost center and therefore they are to be allocated, allocate and then absorb in the production units. All elements of costs such as material, labor and expenses can be categorized into direct and indirect. They are described below.

i. Direct and Indirect Material

Direct material is the material that is identifiable along with the product. For instance, in a cup of tea, quantity of milk consumed can be recognized, quantity of glass in a glass bottle can be recognized and thus these will be direct materials for these products. Indirect material cannot be recognized with the product, for instance lubricants, fuel, oil, cotton wastes etc cannot be recognized with a specific unit of product and hence these are the instances of indirect materials.

ii. Direct and Indirect Labor

Direct labor can be recognized along with a specified unit of product, for instance, while wages are paid as per to the piece rate, wages per unit can be recognized. Likewise wages paid to workers who are directly occupied in the production can also be recognized and therefore they are direct wages. Alternatively, wages paid to workers such as sweepers, gardeners, maintenance workers etc are indirect wages because they cannot be recognized with the specified unit of production.

iii. Direct and Indirect Expenses

Direct expenses considers to expenses that are particularly incurred and charged for particular or specific job, process, service, cost center or cost unit. These expenses are also termed as chargeable expenses. Instances of these expenses are cost of , royalties, drawing, design and layout payable on make use of copyrights, patents, etc, consultation fees paid to architects, surveyors etc. Indirect expenses alternatively cannot be traced to particular product, job, process, service or cost center or cost unit. Various instances of indirect expenses can be provided such as insurance, electricity, rent, salaries, advertising etc.

It should be noticed that the total of direct expenses is termed as 'Prime Cost' when the total of all indirect expenses is termed as 'Overheads'.

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