DIRECT AND INDIRECT EXPENSES- ALL YOU NEED TO KNOW

DIRECT EXPENSES

A direct expense is an expense that is related to the purchase of products. Many companies are in the trade for resale, and they have to buy bulk stock to operate. Direct expenses would refer to anything that is related to what you have bought. Companies that manufacture their own products will assign the costs of materials to direct expenses.

Direct expenses that need to be considered in any business are very much the same throughout. The cost of materials, freight, and import duties are a few of these. These will all affect the costing of the products sold.You do need to factor the cost of staff wages into the equation too. If you are a re-seller, the staff is an expense incurred as they are required to offload and pack the products that you are going to resell.

The staff that you hire for the manufacturing process makes the finished product possible. Their salaries become a part of the expenses against that product.

There are certain areas of direct expenses that will affect the price of products without a doubt. You may find that when fuel surcharges increase, so do the prices. This is a common occurrence and one that is unavoidable.

Companies can only carry the extra costs up to a point. Thereafter, they have no choice but to increase the sales costs.

INDIRECT EXPENSES

Indirect expenses are the costs incurred in the daily operation of a business. They are not related to the sold products.

In many instances, indirect expenses are not allocated to any area in particular.

This is most often true when it comes to administrative costs which may include rentals. Costs incurred that are factory overheads are direct expenses. These costs affect the products manufactured during the period the costs occurred.

At the end of the day, the cost inflates the price of the product at the time of sale. Examples of factory overhead expenses may include things like factory utilities and equipment. Indirect expenses cannot be added to the cost of the product. It should not affect the sales price in any way.

Indirect expenses can also be subdivided into two categories – fixed indirect expenses and recurring indirect costs.

Fixed indirect expenses will refer to costs that are fixed for the duration of a project.

Recurring indirect costs refer to expenses that are paid on a repeat basis.

Indirect expenses, while necessary for the business to operate, cannot be traced back to the products.

 Differences Between Direct and Indirect Expenses

1. Direct Expenses are included in the trading account on the debit side. Indirect expenses are included in the income statement on the debit side.
2. Direct Expenses are the expenses that are incurred in the manufacture of a product or provision of services. As against, Indirect Expenses are incurred in connection to the day-to-day business operations.
3. Direct expenses are those incurred during the production of a product or the provision of services.Indirect Expenses are incurred in conjunction with day-to-day business activities.
4. Direct Expenses form part of the prime cost.Indirect expenses are usually treated as overheads.
5. Direct Expenses are considered when the cost of goods sold is ascertained, whereas indirect expenses do not form part of the cost of goods sold.
6. Direct expenses are inevitable and must be incurred to continue operating and providing goods or services.While indirect expenses are unavoidable, it is possible to cut back on them or merge a few of them to minimise the overall cost of indirect charges.
7. Direct Expenses Examples: Rent, Raw Materials, Cost of land, machinery, factory and Indirect expenses Examples: Electricity and water bills, salary and wages of employees, utilities and overhead expenses