Direct product costs such as raw materials are variable costs. Variable product costs increase in total as more units of products are manufactured.

Costs that are direct to a department could be variable or fixed. For example, a supervisor in the painting department would be a direct cost to the painting department. Since the supervisor's salary is likely to be the same amount each month regardless of the quantity of products manufactured, it is a fixed cost to the department. The supplies furnished to the painting department will be a direct cost to the department, but will be a variable cost to the department if the total amount of supplies used in the department increases as the volume or activity in the department increases.

An indirect product cost is the electricity used to operate a production machine. The cost of the electricity is variable because the total electricity used is greater when more products are manufactured on the machine. Depreciation on the production machine is also an indirect product cost, except it is usually a fixed cost. That is, the machine's total depreciation expense is the same each year regardless of volume produced on the machine.

As you can see, costs can be direct and indirect depending on the cost object: product, department, and others such as division, customer, geographic market. The cost is fixed if the total amount of the cost does not change as volume changes. If the total cost does change in proportion to the change in the activity or volume, it is a variable cost.

To learn more, see the Related Topics listed below: