What are Relationship Costs?

Relationship costs refer to the connection of a cost to a product. Some costs are more obviously connected to a product, such as cotton used for clothing production, while other costs may not be as directly connected, such as factory rent in the clothing production factory.

Below provides an overview of direct, indirect and factory overheads.

Direct Costs

Direct costs are costs that are used in a manufacturing process or service and can easily be traceable to the end product or service. Some direct costs can include either direct materials or direct labour.

• Direct Materials: Direct materials are only materials that are easily traceable to the manufacture of a product. E.g. Wood used in a table.

• Direct Labour: Direct labour is the cost directly associated with the manufacture of a product. E.g. Production line workers' wages.

Indirect Costs

Indirect Cost Indirect costs are costs that are used in a manufacturing process or service but cannot be easily traceable to the end product or service.

Some indirect costs can include:

• Glue

• Paint

• Maintenance and repairs

• Supervisor's salary/wages

• Manager's salary/wages

• Utility costs

• ICT costs

Factory Overheads

Factory overhead is a type of indirect cost that includes all the costs of indirect labour and indirect materials used in the manufacture of a product.

Factory overhead = Indirect Materials + Indirect Labour