Direct Expenses and Indirect Expenses: List, Examples and Difference

To establish a business, it is mandatory to invest some funds to help the business stay afloat. Once the company starts growing and brings in returns, there are certain expenses that you must look after monthly, half-yearly, or annually. 

These costs can come in form of salaries, rents, wages, transportation costs, loans, overdrafts, utility bills, etc. To monitor these expenses properly, we can segregate them into direct expenses and indirect expenses. 

If you are new to these terms, this blog is for you. Keep reading to learn about direct and indirect expenses, their lists, examples and differences. 

What is Direct Expenses?

As the name suggests, direct expenses are those which are associated with a company’s primary operation. These are directly linked with the manufacture and sale of products or services provided. 

Direct expenses are a major component of a business or company's financial metric as it helps them to keep track of their spending. The management assesses these expenses to set the cost of a product or service. 

Furthermore, the direct expenses of a company rely on the manufacture and sale of products or the services it provides. Consequently, direct expenses tend to fluctuate with the speed of production. However, they stay consistent for each output unit and are monitored by the respective department manager. 

Businesses study the direct expenses to calculate their gross profit. Also, the impact of direct expense on a company's profitability is more specific and immediate. 

Now that you know the meaning of direct expenses, let’s take a look at its list and examples before moving on to indirect expenses. 

List of Direct Expenses

The following table comprises the direct expenses list for your better understanding:

Examples of Direct Expenses

Raw materials and labour costs stand as prominent examples of direct expenses. These two parameters contribute towards the manufacturing of products by a company. They also affect the final cost of a product or service that the company provides.  

What is Indirect Expenses?

Unlike direct expenses, indirect expenses are those which you cannot link with the production and delivery of a specific product or service. These are certain necessary costs which a company must bear for its day-to-day business to run smoothly. 

Furthermore, indirect costs stay constant and do not fluctuate with a company's volume of production and sales. In many instances, indirect expenses are not assigned to one particular region. Indirect costs also do not determine the price of a product or service that the business offers. 

You can further classify indirect expenses into two types. These are recurring indirect costs and fixed indirect costs. Those costs that a company must pay regularly are recurring indirect costs. Whereas, costs that stay fixed for a certain duration of the project are fixed indirect costs. 

A business needs to take care of its direct expenses and indirect expenses to maintain a healthy financial record. This record ensures that the company stays tax-compliant and also helps attract investors and lenders who wish to analyse their financial profile before investing. 

Now that you know the meaning of indirect expenses, scroll down for the list and examples of indirect expenses. 

List of Indirect Expenses

The following table covers a list of indirect expenses that a business bears: 

Examples of Indirect Expenses 

Utility bills, rental costs, salaries, depreciation, office supplies, and legal charges are a few examples of indirect expenses. 

Companies must bear these charges to keep running smoothly regardless of the products they manufacture or sell. 

Difference between Direct Expenses and Indirect Expenses

Here is a tabular representation of the differences between direct expenses and indirect expenses: 

To conclude, a company must keep proper track of its direct expenses and indirect expenses for the smooth running of its business. Despite the above differences, both are a crucial component of a company's cost structure and impact its financial performance. Furthermore, both expenses need proper budgeting and forecasting by financial experts to strategise thorough financial planning.