What are Direct and Indirect Expenses?


Direct and Indirect Expenses

Expenses are amounts paid for goods or services purchased. They can either be directly or indirectly related to the core business operations. Type of an expense and Timing at which it is incurred by the business frames the key points of difference between direct and indirect expenses.

Examples of direct and indirect expenses – Rent, light, salaries, wages, sales, etc. Direct and indirect expenses are defined and differentiated as follows;

Direct Expenses

“Direct” as the word suggests are those expenses which are completely related and assigned to the core business operations of a company. They are mainly related to purchases and production of goods/services. Direct expenses are a part of the prime cost or the cost of goods/services sold by a company.

Direct expenses are directly related to the production of the product sold or service rendered, they may differ for different types of companies, such as manufacturing companies, construction companies, service companies, etc.

Direct expenses are shown on the debit side of a trading account.

Examples of Direct Expenses

  • Wages
  • Factory rent
  • Cost of raw material
  • Premises renting
  • Fuel
  • Carriage inwards

Related Topic – What are Sundry Expenses?

Indirect Expenses

Unlike direct, indirect expenses are not directly related and assigned to the core business operations of a firm. Indirect expenses are necessary to keep the business up and running, but they can’t be directly related to the cost of the core revenue generating products or services.

Just like direct expenses, indirect expenses can also be different for different types of organisations. These are usually shared costs among different departments/segments within the firm. 

Indirect expenses are shown on the debit side of an income statement.

Examples of Indirect Expenses

  • Salaries
  • Telephone bills
  • Printing & stationery
  • Legal & Accounting charges
  • Carriage outwards

Difference Between Direct and Indirect Expenses

Direct Expenses Indirect Expenses
1. Expenses or direct costs incurred while manufacturing the main “product” or “service” of the company are termed as direct expenses. 1. Expenses or indirect costs which are not directly related to the core “product” or “service” of the company are termed as indirect expenses.
2. They become a part of the total cost of goods/services sold. 2. Indirect expenses are not included in the total cost of goods/services sold.
3. Shown on the debit side of a trading account. 3. Shown on the debit side of an income statement.
4. Direct expenses can be allocated to a specific product, department or segment. 4. Indirect expenses are usually shared among different products, departments and segments.
5. Examples – Direct labour (wages), cost of raw material, power, rent of factory, etc. 5. Examples – Printing cost, utility bills, legal & consultancy, etc.

 

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