By this I mean the dreaded long and short run. Remember that in the short run the scale of the operation cannot be changed and any expansion in output has to come from what spare capacity may be available. In the long run the entire scale of the operation can be altered. Quite literally the company can open a new factory to meet the increase in demand for its products. Some people prefer to call indirect costs overheads.
Direct costs involve all the costs that can be directly related to the product or service.
An example of this would be the materials needed to make a specific product. Indirect costs are those which cannot be directly allocated to a specific product or service. This might be the postage or telephone costs, which cannot normally be allocated to just one product or service. When we add the direct and indirect costs together we get what are known as the Total costs for the product or service. We also need to make certain that we understand what is meant by the term profit.