Classifying costs as direct or indirect cost is one way of cost classification whereas classifying costs on the basis of their behaviour as fixed or variable costs is just another way of classification of costs. Both classifications are separate and must not be confused together.
The cost that can be traced back to a product or a cost center is considered as direct cost in relation to a product or cost center respectively. Simply put if we can identify a cost to a specific cost object then it is a direct cost.
Indirect costs are such costs that are either not traceable or it is just not economically beneficial to trace such costs back to cost object.
From the above definitions we understood that even fixed costs provided they are traceable to a specific cost object under consideration are basically direct costs.
For example, if direct labour is being paid on monthly basis as opposed to piecemeal basis or daily wages basis then it is a direct cost but will be fixed in nature. To clarify it more, fixed costs are such costs that do not change with the change in activity level. When labour is paid on monthly basis then irrespective of activity level they will be paid the same amount every month. Another example can be fixed amount of royalty that company pays on annual basis for a particular formula used to produce a specific product. It is a direct expense or in other words direct cost as it is traceable back to specific product but it is fixed.
Whereas indirect cost, as said earlier, are such costs that cannot be traced back to a specific cost object. Examples can be of maintenance and inspection costs which will be increased with the increased activity level as more and more units are produced more time and resources for inspection will be needed and as wear and tear of the production facility will increase so does the maintenance cost. Another example can be of electricity costs which are usually indirect in nature but increases with the increase in production activity.
- A cost that be traced back to specific cost object i.e. a product or a cost center etc. is a direct cost and traceable costs can be fixed costs in nature. For example, labour is paid on monthly basis, fixed amount of royalty paid every year.
- Indirect costs can be variable costs in nature. For example maintenance costs, inspection costs, electricity costs.