3. Nature: direct and indirect

Direct cost (prime cost) is expenditure that can be directly identified with a specific cost unit or cost centre. Direct cost can be traced in full the product,service or department that was being costed.

Indirect costs (overheads): are expenditure that can not be directly identified with a specific cost unit or cost centre and must be ‘shared out’ on an equitable basis.

Direct material is all material becoming part of the product and is part of the prime cost Examples:

(1) Component parts.

(2) Part-finished work which is transferred from department A to department B becomes finished work of deparment A and a direct material cost in department B.

(3) Primary packing materials.