Hello,

I'm having trouble understanding Direct Cost, Overhead Cost and Indirect Cost. ***Also Period cost and Product cost.
please can anyone explain it and give examples for each! thanks

Have you Googled each of these terms?

Hello! I can help explain these concepts to you. Let's start with Direct Cost, Overhead Cost, and Indirect Cost by providing examples for each:

1. Direct Cost:
Direct costs are expenses that can be directly attributed to producing a specific product or service. These costs are easily traceable and usually vary with the production volume. Examples of direct costs include the cost of raw materials, direct labor wages for the workers involved in manufacturing the product, and direct expenses like packaging materials or specific equipment used solely for that product.

For example, if you are a bakery, the direct costs incurred in producing a specific cake would include the cost of flour, sugar, eggs, and the wages of the baker who prepares the cake.

2. Overhead Cost:
Overhead costs (also known as indirect costs) are expenses that are not directly linked to the production of a particular product or service. These costs are necessary for running the overall operations of a business and are not easily identifiable or traceable to a specific cost object. Examples of overhead costs include rent, utilities, insurance, maintenance, and administrative expenses.

For example, in a manufacturing company, the overhead costs would include the salary of the factory supervisor, rent of the production facility, depreciation of machinery, and general utilities like electricity used throughout the manufacturing process.

3. Indirect Cost:
Indirect costs refer to expenses that are not directly associated with a specific cost object (like a product or service) but are necessary for the overall functioning of the business. While indirect costs and overhead costs are often used interchangeably, indirect costs can also include costs that are not related to operational expenses, such as marketing expenses or research and development costs.

For example, indirect costs in a retail business might include the salaries of the marketing team, advertising expenses, or costs associated with market research.

Now, moving on to Period Cost and Product Cost:

1. Period Cost:
Period costs are expenses that are not directly tied to the production or manufacturing process. They are incurred over a specific period, such as a month or a year. These costs are expensed immediately and are not part of the cost of products or inventory. Examples of period costs include sales commissions, administrative salaries, advertising costs, and rent.

2. Product Cost:
Product costs are expenses directly associated with producing or manufacturing a product. These costs are initially recorded as part of the inventory and are only expensed when the product is sold. Product costs consist of direct materials, direct labor, and manufacturing overhead. They are considered assets until the product is sold, at which point they become cost of goods sold expenses.

For example, in a car manufacturing company, the product costs would include the cost of steel, wages of assembly line workers, and the allocated overhead cost for each car produced.

I hope this explanation clarifies the differences between these cost types for you! Let me know if there's anything else I can assist you with.