Costs are divided into direct and indirect according to the provisions of Article 318 in the Tax Code. The legislation defines a special list.
So, direct expenses include:
- For the purchase of materials and raw materials that are used in production.
- For the purchase of components or semi-finished products.
- To pay employees directly involved in the production process. These expenses include payments on compulsory pension insurance, on financing the funded and insurance honor of a retirement pension and other deductions.
- For depreciation of fixed assets that are used in production.
The category of indirect costs includes the sum of all other costs, with the exception of non-operating expenses. The list of expenses is contained not only in the Tax Code, but also in the Declaration on income tax.
Why separate direct and indirect costs?
In this matter, it is necessary to note the main difference between the costs. So, indirect costs in total relate fully to the costs of the current tax (reporting) period, and direct costs to expenses of this period as goods are sold, taking into account the balances of work in progress. An exception is the case when the company is focused on the provision of services.
It should be noted that the list defining direct and indirect costs and given in the Tax Code is mandatory. However, the company has the right at its discretion to add its expenses to this or that list.
If direct and indirect costs are not specifically defined in the accounting policies of an organization , then by default it is considered that they correspond to the list of Article 318 in the Tax Code. And when introducing legislation into the established list of changes, the company will have to take them into account. In this regard, it is better to approve direct and indirect costs independently in the accounting policy of the company.
The separation of costs in management accounting allows you to use a simplified accounting form, to forecast income. In accordance with a given amount of income when dividing costs, you can calculate the optimal volume of trade, as well as the corresponding level of costs. Along with this, the appropriateness of marketing certain types of products is determined.
One of the practical results of the application of cost classification in accordance with the principle of dependence on sales volume is the ability to forecast income. At the same time, the estimated state of expenses, the determination of the volume of sales that will ensure break-even activity, for each specific case are taken into account.
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. Along with this, it becomes possible to study the dynamics of changes in the expenses of the current period in comparison with the previous one, as well as the plan as a whole and its individual articles. The analysis allows you to establish and quantify the factors that affect the change in costs, to 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 quantify reserves for lowering the costs of manufacturing and marketing of goods.
The tasks facing accounting, in many respects overlap with the tasks that management analysis performs , 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 specifically determine which costs are direct and which are indirect. This largely depends on the type of activity of the company.