Direct expense is directly involved in the production process in the case of the production or sale process in the case of commercial activities. This expense can be assigned to a specific product, service, customer, department, segment or project based on relevant documents. Such a document may be evidence of material collection, indicating the amount of material collected for the production of a given product, or a labor card, containing the number of hours worked on the production of a particular product and the hourly rate. These expenses are related to the purchase of goods for the company. They are often used to determine the price of your products or services. They become part of the total cost of goods or services sold.
Examples of direct expenses
Examples of direct expenses include:
- direct materials  - raw materials and basic materials from which a given product and auxiliary materials and packaging are made, if they can be included in specific products. These can be identified in the product and can be measured and directly charged to the product. Examples of direct materials are cloth in dress making, car parts in mechanics.
- direct labour  - wages of workers employed directly in the production of specific products together with surcharges on these wages, the commission and payroll taxes related to the sale of goods or services (social insurance premium and labor fund),
- Other Direct Expenses or Charges - carriage and freight on materials bought for particular jobs, if such carriage has not been included in the cost of the materials, consumption of special tools used only for the production of specific products, hire of special machinery or plant for a particular job.
Variance of direct expenses
Direct expenses are entirely dependent on the production volume. It means they are variable costs. These costs will change if you produce more or less products at any given time. The costs are divided into :
- proportional costs - costs change in direct proportion to changes in production volume (costs of direct materials),
- progressive costs - the increase in costs is faster than the increase in the level of production. The unit cost is the size that grows with the increase in the scale of production (wage costs, when production growth is achieved by employing overtime employees, on Saturdays or Sundays and holidays. Wage rates for overtime or worked on non-working days are in fact higher than the rates paid on normal working days).
- degressive costs - the increase in costs is slower than the increase in the level of production. The unit cost for this type of costs is a small decreasing amount due to the increase in production (wage costs of employees employed for piecework during the implementation of a new product).
- regressive costs - production growth causes a drop in costs. The unit cost decreases at a fast pace in relation to the production volume (the cost of heating the room).
- Cost Accounting p. 6
- Cost Accounting p. 6
- Management and Cost Accounting p. 65
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Author: Marta Bodzioch