Direct and indirect costs

The costs are divided into direct and indirect costs under the provisions of Article 318 of the Tax Code. The legislation defines a special list.

So, to direct costs include:

1. On the purchase of materials and raw materials that are used in production.
2. For the purchase of components or semi-finished products.
3. On payment of employees directly involved in the production process. These expenses include payments for mandatory pension insurance, for the financing of the accumulative and insurance premiums of labor pensions and other deductions.
4. On depreciation of fixed assets, which are used in the production of products.

The category of indirect costs includes the sums of all other costs, except for non-sales. The list of expenses is contained not only in the Tax Code, but also in the Declaration on income tax.

Why share direct and indirect costs?

In this issue, it is necessary to note the main difference between costs. Thus, the indirect costs in the amount fully relate to the costs of the current tax (reporting) period, and direct costs to the expenses of the given period as the goods are sold, taking into account the balances of unfinished production. An exception is the case when the company's activities are aimed at providing services.

It should be noted that the list determining direct and indirect costs and listed in the Tax Code is mandatory. However, the company has the right, at its discretion, to add to one or another list its expenses.

If direct and indirect costs are not specifically defined in the accounting policy of the organization , then by default it is considered that they correspond to the list of article 318 in the Tax Code. And when the legislation is included in the established list of changes, the firm will have to take them into account. In this regard, it is better to approve direct and indirect costs yourself in the accounting policy of the company.

Division of costs in management accounting allows you to use a simplified accounting form, to forecast income. In accordance with the given amount of income in the division of costs, you can calculate the optimal volume of turnover, as well as the corresponding level of costs. Together with this, the expediency of marketing these or other types of products is determined.

As one of the practical results of applying the classification of costs in accordance with the principle of dependence on the volume of implementation is the possibility of forecasting income. It takes into account the expected state of expenditure, the definition of sales, which will provide a break-even activity, for each specific case.

The analysis of direct and indirect costs allows you to study the structure and composition of production costs in order to determine the main directions for finding reserves to reduce them. Together with this, it becomes possible to study the dynamics of changes in the expenditures of the current period in comparison with the previous one, as well as the plan as a whole and its separate articles. The analysis allows you to establish and quantify factors that affect the change in costs, determine the contribution of each individual unit to the overall result achieved by the company to reduce costs. In addition, it becomes possible to identify and measure the amount of reserves to reduce the costs of manufacturing and marketing of goods.

The tasks that face accounting, in many respects overlap with the tasks that are carried out by management analysis, this is due to the fact that accounting in management is considered a subsystem of accounting.

As practice shows, it is not always possible to specify what expenses are direct, and which are indirect. In many ways, this depends on the nature of the firm's activities.