From the point of view of their nature or functionality, costs can be classified as direct and indirect, and from the point of view of their behavior, in relation to the level of activity of the company, in fixed and variables.
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Direct costs: this type of cost is the one that has to do directly with the product or service. The identification of the reference product is decisive in determining the scope of direct costs; In the extreme case that said reference unit or product were the entire company, all costs would be direct. When costs are related to the product or service, they can be divided into direct raw material costs and direct labor costs.
Direct labor: As said in the previous paragraph, this concept is a direct cost of the product or service in the company. Generally, direct labor is the one that works on the machines and in the production process (for example, service personnel, maintenance, etc.). On the other hand we have indirect labor costs, which are those labor costs of all employees who do not participate directly in the production of the product or service.
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Indirect costs: are those costs that are shared between several reference units. Usually, only general production costs, labor costs are classified as indirect. indirect (previously explained), energy, facilities, insurance, rental payments, etc.
Fixed costs are all those costs that do not vary with the level of productivity of the company and the variable costs They are those that vary proportionally (note that the increase is not proportional in all companies) depending on the volume of production. However, since all costs are variable in the long term, those that do not vary in the short term within a period are considered fixed. determined production interval, located around the normal activity point of the company, this is because, for example, the lease is considered as a fixed cost, but nevertheless we see that in most cases there is an increase in rental costs throughout years. Another clear example that fixed costs can be variable is when the company determines to drastically increase production levels so it has to increase the square meters of the plant or increase the points where services are offered, which would cause an increase in the cost step fixed. (more details in this article; Fixed Costs and Variable Costs)
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So what is the relationship between direct and indirect costs versus fixed and variable costs?
Although most of the times direct costs are variable and indirect costs are fixed, this is not always the case; For example, the materials and direct labor adjustable with the activity are direct and variable costs, the direct non-adjustable labor with the activity is a direct and fixed cost, the amortization of equipment that is neglected due to wear and tear and that is used in the production process of various products and supplies not assigned to a product are indirect and variable, indirect labor and plant depreciation are indirect and fixed. Commercial, administrative and financial expenses are not indirect production expenses in the strict sense, but they are indirect of the company and also fixed.
