Mangala Karunarathne - Followed

Hi Manasa,

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This is a detailed answer on Direct and Indirect Expense/cost is described

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

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

Direct Expenses

Direct,” as the word suggests, are those expenses that are entirely 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 sold by a company.

Direct expenses are directly related to the production of the product sold or service rendered. They may differ for different 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

Indirect Expenses

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

Just like direct expenses, indirect expenses can also be different for different types of organizations. 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