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ConceptsCoach
ConceptsCoach , Certified Public Accountant (CPA)
Category: Finance
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Experience:  Chartered Accountant and MBA
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What is the difference between direct and indirect expenses?

Customer Question

1. What is the difference between a direct cost and an indirect cost? Give an example of each in the context of teaching an accounting class at your school.

2. How can out-of-pocket costs and opportunity costs be applied to your personal financial decisions?

Submitted: 5 years ago.
Category: Finance
Expert:  ConceptsCoach replied 5 years ago.

Direct cost: A cost that can be directly associated to a specific cost object. Consider, for example, cost of paper in the magazine, cost of labor for packing department etc. It is a sum of direct material and direct labor. Direct manufacturing cost or direct product costs are used interchangeably for direct cost.

Direct material: A cost of material that can be directly associated to a specific cost object. Consider, for example, cost of paper in the magazine. Raw material is another word for direct material.

Direct labor: Labor cost that can be directly associated to a specific cost object. Consider, for example, cost of labor used to pack the magazine.

Indirect cost: A cost that cannot be directly associated to a specific cost object. Consider, for example, cost of administration, cost of equipment rental for packing department etc. It is a sum of indirect material, indirect labor and other manufacturing overheads. Indirect manufacturing cost, manufacturing overhead or indirect product costs are used interchangeably for indirect cost.

Indirect material: A cost of material that cannot be directly associated to a specific cost object. Consider, for example, cost of glue used in the packing.

Indirect labor: Labor cost that cannot be directly associated to a specific cost object. Consider, for example, wages of cleaner.

Other manufacturing overheads: Any other cost that cannot be directly associated to a specific cost object. Consider, for example, taxes, rent of premises, insurance of building, depreciation of equipment etc.

Out of pocket expenses: Expenses for which you pay by cash or credit. Consider, for example, paying for watching a movie at a theater.

Opportunity cost: Cost involved for doing or not doing an alternate course of action. Consider, for example, paying for watching a movie at a theater has an opportunity cost of not staying home with family.

Hope this helps.

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