Ans. 2.

Direct Expense: Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a product or for provision of service and can be directly traced in an economically feasible manner to a cost object. The following costs are examples for direct expenses:
(i) Royalty paid/ payable for production or provision of service;
(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provision of service.
The above list of expenses is not exhaustive; any other expenses which are directly attributable to the production or service are also included as direct expenses.
Measurement of Direct Expenses
The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties and taxes (for which input credit not available), commission and other directly attributable costs. In case of sub-contracting, where goods are get manufactured by job workers
independent of the principal entity, are measured at agreed price. Where the principal supplies some materials to the job workers, the value of such materials and other incidental expenses are added with the job charges paid to the job workers.
Treatment of Direct Expenses
Direct Expenses forms part the prime cost for the product or service to which it can be directly traceable and attributable. In case of lump-sum payment or one time payment, the cost is amortised over the estimated production volume or benefit derived. If the expenses incurred are of insignificant amount i.e. not material, it can be treated as part of overheads.