Before starting a new business, it is worthwhile to estimate the future costs of the project as accurately as possible. After all, such important indicators as the profitability of the project and the terms of its payback will depend on them.
The activities of any commercial enterprise cannot be imagined without the cost of certain resources. All costs involved in the implementation of a business project can be divided into direct and indirect. All these costs must be tried to predict as accurately as possible in order to draw up a business plan.
What is included in direct costs
Direct costs are directly related to the products or services produced by the enterprise. They are included in the cost price directly. When calculating income tax, direct costs are recognized as products are sold.
Most often, the following groups are included in the structure of direct costs:
- material costs;
- the cost of wages and salaries;
- depreciation deductions;
- other types of costs.
The number of material costs includes all materials used, with the exception of products of our own production. These are, in particular, raw materials, semi-finished products, building materials, components, fuel, spare parts, containers, etc. Their list and specific weight differs depending on the industry. For example, for metallurgy, an important share will be occupied by the cost of electricity, and for the food industry, the largest share will be accounted for by raw materials. The criterion for classifying material costs as direct ones is that the materials included here, in the course of their further redistribution, become part of the finished product, i.e. transfer their value to it.
The costs of wages include the cost of wages of workers directly involved in the production process. This, for example, is the salary of programmers in a website development company, or craftsmen in a construction organization. But the salaries of accountants and administrative staff can be attributed to indirect costs. It should be borne in mind that this group of costs includes not only salaries, but also various incentives, bonuses, vacation pay, as well as various deductions to non-budgetary funds.
Depreciation expenses are charged using depreciation rates. They represent the process of partial transfer of the cost of fixed assets as they are depreciated at cost.
Costs often include the cost of ancillary production services and external contractors. Other types of costs that are directly related to production can also be attributed to direct costs.
What are indirect costs?
Indirect costs cannot be directly transferred to the cost of production or provision of services, because they are distributed among different types of products. They are not directly related to the manufactured products, they are often also called overhead costs.
These are, for example, rental costs, administrative and management costs, expenses for training workers, stationery, communication services, etc. When starting a business, it is quite problematic to predict all indirect costs, there may always be unforeseen costs.
It should be noted that the specified list and the division of costs into direct and indirect is very conditional, each organization determines it independently based on the specifics of the organization of production. For example, the salaries of accountants in a medical facility would be an indirect cost, but in an outsourced accounting company, it would be a direct cost.
