QUESTION 67

WHAT’S THE DIFFERENCE BETWEEN DIRECT COSTS AND OVERHEADS?

Why it’s important: Direct and indirect costs are used to calculate the organisation’s gross and net profit.

UNDERSTANDING COSTS:

Direct costs are the costs incurred in the production of the organisation’s goods or services. They only include the materials used in the production of the goods or service, and the salaries/wages paid to those people directly involved in the production process.

Overheads are all the other expenses that the organisation incurs as it tries to sell its goods or services. They include such things as advertising, admin salaries, staff training and development, R&D expenses, rental costs, rates, etc. These costs are referred to as indirect costs or overheads. ...

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