Question

What is the difference between a direct and indirect cost? Variable versus fixed cost? What are the differences in accounting for inventoriable (product) versus period costs?

Answer 1

BASIS FOR COMPARISON	DIRECT COST	INDIRECT COST
Meaning	A cost that is easily attributable to a cost object is known as Direct Cost	Indirect Cost is defined as the cost that cannot be allocated to a particular cost object.
Benefits	Specific projects	Multiple projects
Aggregate	When all the direct costs are taken together they are known as prime costs.	Total of all the indirect costs is called as overheads or oncost.
Traceable	Yes	No
Examples	Direct labor, direct expenses	Indirect material, indirect labor, indirect overheads

BASIS FOR COMPARISON	FIXED COST	VARIABLE COST
Meaning	The cost which remains same, regardless of the volume produced, is known as fixed cost.	The cost which varies with the change in output is considered as a variable cost.
Nature	Time Related	Volume Related
Incurred when	Fixed costs are definite, they are incurred whether the units are produced or not.	Variable costs are incurred only when the units are produced.
Unit Cost	Fixed cost changes in per unit with every change in unit produced	Variable cost remains same, per unit.
Behavior	It remains constant for a given period of time.	It changes with the change in the output level.
Examples	Depreciation, Rent, Salary, Insurance, Tax etc.	Material Consumed, Wages, Commission on Sales, Packing Expenses, etc.

BASIS FOR COMPARISON	ACCOUNTING FOR INVENTORIABLE (PRODUCT COST)	PERIOD COST
Meaning	The cost that can be apportioned to the product is known as Product Cost.	The cost that cannot be assigned to the product, but charged as an expense is known as Period cost.
Basis	Volume	Time
Which cost is regarded as Product / Period Cost?	Variable Cost	Fixed Cost
Are these costs included in inventory valuation?	Yes	No
Constitutes	Manufacturing or Production cost	Non-manufacturing cost, i.e. office & administration, selling & distribution, etc.
Part of Production cost	Yes	No
Examples	depreciation on machinery, wages to labor, etc	Salary, rent, etc.