DIRECT EXPENSES

Direct Expenses are those expenses which are incurred on the goods purchased , till they are brought to the place of business for sale. Examples of such expenses are freight inwards , insurance , customs ( import ) duty , clearing charges , octroi duty , cartage , etc . In a manufacturing concern , besides the above , expenses incurred for purposes of production such as wages , power and fuel , factory rent , etc .,  also Directed Expenses .

Let us discuss Direct Expenses individually .

1.Carriage or Freight or Cartage Inwards :  It is the cost of bringing materials to the firm's godown and making them available for use . If any freight or Carriage is paid on any asset ,like machinery , it is added to the cost of the asset and not debited to Trading Account .

2. Manufacturing wages : Wages paid to workers in the factory , including stores , are debited to the Trading Account ; if any amount is outstanding it is accounted for so that the total wages for the period are debited to  Trading Account . If wages are paid for installation of machinery , it is debited to machinery Account.

If the Trial Balance includes a single amount for ' Wages  and Salaries ', it is assumed that the item includes  the salaries of the supervisory staff in the factory . Therefore , the amount is shown in the Trading Account. But , if the item in the Trial Balance is shown as ' Salaries and wages ', it is shown in the profit and Loss Account . It is assumed that the item includes the wages of office staff only .

3. Power and Fuel : Cost of coal used in the boiler or electricity consumed in running the machines is included under this head of accounts . Expenses incurred including not paid , i.e., outstanding expenses are debited to Trading Account .

4. Factory Lighting : Electricity consumed for providing light for running the factory is debited to Trading Account. If there is a common meter for the office and the  factory , the total bill should be appropriately divided between the two - only the portion relating to the factory is debited to Trading Account ; the other portion is debited to Profit and Loss Account .

5. Factory Rent and Rates : Rent paid for the factory premises as well as the municipal taxes ( which are called rates ) or charges for water , etc .,  are debited to Trading Account. If the office and the factory are in the same premises , total rent and rates have to be suitably apportioned .

6. Duty on Purchases : Any duty ( such as octroi ) paid in connection with the purchases of goods is debited to Trading Account , it being part of purchase cost .

7.Royalties are the payments which are made for acquiring the right to use patents.It is treated as a Direct Expense if it is based on the number of unit produced .

8. Consumable Stores : These are incurred to keep the machine in right condition and include engine oil , cotton waste , soft soap , oil grease and waste , consumed in a factory .

Stores consumed during the year = Opening Balance in Stores + Purchases of Stores during the year - Closing Balance of Stores .