Direct costs and variable costs are similar in nature and both types of costs involved in production. Direct costs-these are costs that can be directly attributed to the product, while variable costs change with level of output.
Direct costs are costs directly related to the product or service that the company produces. Direct costs can be easily traced to their cost. The cost objects may include products, services, departments, or projects.
Direct costs include:
- Direct labor
- Direct materials
- Production delivery
- Wages related to the production
Direct fixed costs do not change and can be traced to the cost object. However, direct variable costs change with the level of production.
Variable costs are costs that change as production of a product or service increases or decreases. Unlike direct costs, variable costs depend on the production capacity of the company. When the level of production increases, variable costs will increase. Conversely, variable costs fall because of lower production levels.
Direct costs can be variable costs or fluctuate with volume. For example, the packaging costs associated with the product will be direct costs and variable costs, as the packaging costs will increase as sales increased. Raw materials used in the manufacture of the product will also be variable costs, as the cost of materials will rise and fall depending on sales of the product. Raw materials will also be direct costs.
However, variable costs should not be directly associated with the product. In other words, variable costs can be indirect costs.
For example, a company that produces mobile phones and has multiple production machines for the manufacture of their devices. Production equipment need electricity. The cost of electricity is indirect, as it cannot be tied to a specific product or machine. However, the cost of electricity is a variable cost, increasing electricity consumption, as the number of products increases. With variable costs, the total costs associated with the change in the value of the object as changes in the level of production.