Difference between Direct Cost, Indirect Cost and Expenses

The measurement, allocation and identification of costs can assist to find out the actual profit of company. The categorization of different costs depends on different criteria such as variability, controllability, relationship, function, and so forth. In view of the relationship, the costs are grouped into two parts as one is direct cost and other is called as indirect cost. The purpose behind cover between these two is the cost which is related to a specific cost item is called as direct cost and whatever is left of the costs is called as indirect cost. Expenses are referred to as overhead or operating expenses. In this article, we are going to discuss the contrasts between these terms i.e. direct cost, indirect cost and expenses.

Direct Cost

Direct cost is the cost that can be specifically inferable from/related to/connected with the particular cost objects like an item, activity, function or project. In light of components, direct costs are characterized into three parts that include direct material, direct expense and direct labour. When these parts are accumulated then they are called as prime cost. Direct material is the expense of material that can be allocated to the production like raw material used in production. Direct expenses incorporate the various costs that are straightforwardly connected to production of an item like job processing charges, sub-contracting expenses, hire charges for equipment and tools. Direct labour is the wages to the workers that can be related to a cost object like bonus, incentives, provident fund etc.

Indirect Cost

Indirect costs are defined as the costs that can’t be straightforwardly given to /identified with/related to a specific cost items. However, it benefits various cost items or projects. It is impractical to ascertain them for a solitary cost item. In any case, it should be distributed over different items and also among the distinctive departments of a company. It incorporates production overheads, selling and distribution overheads, administration overheads. The indirect costs are grouped into parts that are indirect material, indirect labour, indirect expense and these are called overheads or on-costs. Indirect material can be defined as the material cost which can’t be related to a specific item or project like lubricants. Indirect labour can be defined as the wages to the representatives that can’t be allocated to a specific cost item like wages to the administration employees. Indirect expense includes all the costs other than indirect labour and material that are incorporated into this classification like rent, interest, tax etc.

Expenses

Expense is an amount of money that must be spent especially regularly to pay for something. Expenses are shown on profit and loss statement of a business.

Direct Cost vs. Indirect Cost vs. Expenses

Definition

Direct cost is a cost that is effectively allocated to a particular cost item.

Indirect cost is a cost that can’t be distributed to a specific cost item.

An expense is an on-going payment. It includes payment for utilities, rent, payroll and marketing. It is the money spent to generate revenue. For instance, a company spends money on advertising to get customers; on rent of a retail shop; on web-page to get digital customers, etc.

Benefits

As direct costs only benefits the one project or product.

Indirect costs, on the other hand, benefits more than one projects or products.

Expense generates revenue. No asset is associated with an expense. It is a cost that is used up for building a business. It has to be paid periodically. Expense is deductible on company’s business tax return and hence reduces the business’s income tax bill.

Collective

When all direct costs are grouped altogether then these costs are called as primary costs.

When all indirect costs are grouped collectively then these costs are called as on-costs or overheads.

Observable

Direct cost is observable.

Indirect cost cannot be definitely observable.

Expenses are observable. They are to be paid periodically.

Categorization

Direct cost is classified into three types which are direct material, direct expense and direct labour.

Indirect cost is also classified into three types which are administration overheads, production overheads and selling and distribution overheads.

There are various types of business expenses. Some of these are: wages and salaries paid to workers and employees, location cost, rental cost, leasing cost, office expenses, accounting and bank expenses, education and training expenses, office supplies, business insurance expenses, network and communication expenses, etc.

Conclusion

From above article we come to know that direct cost is a cost that is effectively allocated to a particular cost item whereas indirect cost is a cost that can’t be distributed to a specific cost item. As direct costs only benefits the one project or product but on the other hand indirect costs benefits more than one projects or products. When all direct costs are grouped altogether then these costs are called as primary costs whereas all indirect costs are grouped collectively then these costs are called as on-cost or overheads. Direct cost is observable but indirect cost isn’t definitely observable. Direct cost is classified into direct material, direct expense and direct labour. However, indirect cost is classified into administration overheads, production overheads and selling and distribution overheads. Expenses are the cost borne by a company. They are defined as an outflow of money or assets to another individual or company as a payment for a product or an item.Which is better in your opinion?