Direct vs Indirect Expenses
The distinction between costs specifically traceable to particular cost objects (direct) and those requiring allocation because they benefit multiple areas (indirect).
Direct vs Indirect Expenses
The classification of costs based on their traceability to specific cost objects, with direct expenses being clearly attributable to particular products, services, or departments, while indirect expenses benefit multiple cost objects and require allocation.
For example, in a printing business, paper used for a specific customer order is a direct expense, while printer maintenance, building rent, and administrative salaries are indirect expenses that must be allocated across multiple jobs or departments.
This distinction affects cost assignment methods, with direct expenses traced directly to cost objects and indirect expenses allocated using cost drivers or predetermined rates. Understanding which costs are direct versus indirect is fundamental to cost accounting systems, product pricing, contract bidding, and departmental performance evaluation. Direct costs typically provide a more objective basis for decision-making than allocated indirect costs.