What are direct and indirect costs, and how do they make up the cost of a product?
Direct and indirect costs of manufacture, fixed and variable costs, and calculating the cost of producing a product.
A CCEA GCSE Engineering and Manufacturing answer on the direct and indirect costs of manufacture, fixed and variable costs, and how to calculate the total cost and cost per item of producing a product.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
CCEA Unit 3 expects you to know the costs of manufacture: the difference between direct and indirect costs (and variable versus fixed costs), and to calculate the total cost and the cost per item of producing a product.
The answer
Direct and indirect costs
Fixed and variable costs
Calculating the cost of a product
The total cost of a batch is:
And the cost per item is:
Worked example: costing a batch
Examples in context
- Example 1. A bracket order
- The materials and the wages of the workers making the brackets are direct (variable) costs; the factory rent and lighting are indirect (fixed) costs shared across everything the factory makes.
- Example 2. Pricing
- A company adds up direct and indirect costs to find the cost per item, then adds a profit margin to set the selling price.
- Example 3. Bigger batch, lower unit cost
- Doubling the batch size spreads the same fixed overheads over twice as many parts, so each part costs less, which is why mass production is cheaper per item.
The pattern is that the cost of a product is built from direct costs that scale with quantity and indirect overheads that are shared, and spreading overheads over more items lowers the cost per item.
Try this
Q1. Give one example of a direct cost and one example of an indirect cost. [2 marks]
- Cue. Direct: materials or direct labour. Indirect: rent, lighting, maintenance or management salaries.
Q2. Materials cost 3 pounds and labour 2 pounds per item; fixed costs are 500 pounds for 100 items. Find the total cost. [2 marks]
- Cue. Variable ; total pounds.
Q3. Why does the cost per item fall as more are made? [1 mark]
- Cue. The fixed overheads are spread over more items, so each item carries a smaller share.
Exam-style practice questions
Practice questions written in the style of CCEA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
CCEA style4 marksExplain the difference between direct costs and indirect costs in manufacturing, giving two examples of each.Show worked answer →
Direct costs can be traced directly to making each product. They include the materials used in the product and the direct labour (wages of the workers making it).
Indirect costs (overheads) cannot be traced to one product but are needed to run the business overall. They include rent and rates on the factory, heating and lighting, and management/administration salaries (also machine maintenance and insurance).
Markers reward the traceable-to-the-product definition for direct (with two examples such as materials and direct labour) and the overhead definition for indirect (with two examples such as rent and lighting).
CCEA style4 marksA company makes a batch of 500 brackets. Materials cost 2 pounds per bracket, direct labour costs 3 pounds per bracket, and fixed overheads for the batch are 1000 pounds. Calculate the total cost of the batch and the cost per bracket.Show worked answer →
Variable (direct) cost per bracket pounds.
Total variable cost for 500 pounds.
Total cost variable cost fixed overheads pounds.
Cost per bracket pounds.
So the batch costs 3500 pounds in total, or 7 pounds per bracket.
Markers reward the variable cost per item (5), total variable (2500), adding fixed overheads (3500 total) and dividing by 500 to get 7 pounds each.
Related dot points
- Material costs: the effect of stock form and shape and quantity on cost, and the cost and sustainability of material disposal and recycling.
A CCEA GCSE Engineering and Manufacturing answer on material costs, how the stock form, shape and quantity of a material affect price, and the cost and sustainability issues of disposal and recycling.
- Scales and methods of production: one-off (job), batch, mass and continuous production, and just-in-time.
A CCEA GCSE Engineering and Manufacturing answer on the scales and methods of production, one-off, batch, mass and continuous production and just-in-time, and how the quantity decides the method.
- Quality control and quality assurance: inspection, measuring instruments, gauges and the difference between QC and QA.
A CCEA GCSE Engineering and Manufacturing answer on quality control and quality assurance, the inspection and measuring instruments used, the role of gauges, and the difference between QC and QA.
- Tolerance and dimensional accuracy: nominal size, upper and lower limits, and calculating the tolerance of a dimension.
A CCEA GCSE Engineering and Manufacturing answer on tolerance and dimensional accuracy, covering nominal size, upper and lower limits, calculating tolerance, and why tolerances let parts be made and fit together.
- Computer-aided manufacture (CAM) and CNC machining: how a CAD model drives automated manufacture, with advantages and disadvantages.
A CCEA GCSE Engineering and Manufacturing answer on computer-aided manufacture (CAM) and CNC machining, how a CAD model is used to control automated machines, and the advantages and disadvantages of CAD/CAM.