As a small business owner, it is always important that you track all your expenses, but it’s also important that you track your direct expenses and indirect expenses separately.
Tracking your direct and indirect expenses separately will allow you to follow your budget more closely. It will also help you price your products or services more accurately.
What are the direct expenses and indirect expenses?
Direct Expenses are the expenses which a business incurred or will incur to manufacture a product or provision of service. On the other hand, Indirect Expenses are incurred in running the day-to-day business operations of a company.
Examples Of Direct And Indirect Expenses
Examples of direct expenses are; direct labour (wages), cost of raw material, power, rent of factory, etc. Examples of indirect expenses are; printing cost, utility bills, legal & consultancy, postage, bad-debts, etc.
You can deduct business expenses from your taxes, so tracking your direct and indirect expenses separately will help you take advantage of those deductions, which will lower your tax burden.
Difference Between Direct Expenses And Indirect Expenses
1. Direct Expenses
Direct expenses can be traced to a specific product, service, customer, or project. These expenses are typically easy to assign because you can trace them back to a specific project, product, or even department. They are often used to determine the price of your products or services. Direct expenses are generally (but not always) variable costs.
Examples Of Direct Expenses
- direct labor – i.e. the cost of paying employees to produce your products;
- direct materials, including raw materials;
- commissions; and
- manufacturing supplies.
2. Indirect Expenses
Indirect expenses are trickier to assign to individual departments or projects because they cannot be directly traced back to a specific product, service, customer, or project. They’re part of your company’s overhead expenses and are the cost of maintaining your business, so they’ll exist even if you’re not manufacturing a product or performing a service.
Although indirect expenses cannot be traced back to a specific service or product, it’s still important to acknowledge indirect expenses when you’re pricing your products and services. Indirect expenses are generally (but not always) fixed costs.
Examples Of Indirect Expenses
- salaries of workers
- insurance premium
- depreciation of equipment
- equipment maintenance
- facility rent and utilities
- office supplies
- advertising and marketing.