To make calculating cost per unit easier, costs are split into the following categories:
Direct costs – This is an item of cost that is traceable directly to a unit of production
produced by a manufacturing organisation or a unit of service delivered by a service
delivery organisation. The total of all direct costs is known as the “prime cost” per
unit. These will include cost of raw materials used for production.
Indirect costs – This is an item of cost that cannot or cannot be easily identified
directly with any one finished unit. Expenses that do not relate directly to production
(non-production costs) will all be classified as indirect costs and these are usually
known as “overheads”. These will include HR costs, IT support, selling & distribution.