Question

Why are the terms direct cost and indirect cost independent of the terms fixed cost and variable cost? Give an example to illustrate.

Answer 1

Direct costs and Variable cost are similar in nature and they are essential costs in production.Direct costs are those cost that are directly attributable to production and can be traced with in the product..example Direct materials,direct labour etc

Where as Variable costs are those costs which varies with level of production.Variable costs depends on production volume.Variable cost increases with increase in production volume and decrease in decrease of prodcution volume.

Although labor cost are fixed costs some portion of labour cost include in Variable cost.

Example Cost of electricity apportioned in prodcution of a unit of product is included in the variable cost of such product.

Indirect costs are those cost which are indirectly attributable to the product . it can either be fixed or variable. Indirect traces of the indirect costs can be found in the prodcut.Those cost are not directly related to production.Indirect cost are finacially feasible. Example Indirect cost are dependent on nature of industry..Petrol expense in a service industry is indirect cost where as in an airline industry fuel expense is direct costs

Fixed costs are those cost that are fixed in nature.It doesnot varies with the level of production.Fixed costs include rent expenses,depreciation expenses etc. Fixed costs must be wholly covered to acheive break even o=poiunt