Question

What is the most important determinant of whether a cost is considered Direct vs. Indirect?

Answer 1

The most important determinant of whether a cost is direct or indirect is whether cost varies in relation to each unit of production. The cost incurred should be directly associated with the product produced. For example, direct material consumed in production as per Bill of Material is direct cost. Labor engaged in production floor, assembling, packing, etc are direct costs. Costs which facilitate production are indirect cost. For example, Building and Equipment depreciation and maintenance, Property taxes, Plant insurance, etc