Direct expenses and indirect expenses are the two most commonly used terminologies, that are used to represent different expenses in a business. Both of these accounting modules play a very significant role in maintaining the accuracy of an organization’s financial record. In this article, we will understand the complete difference between direct and indirect expenses. The content of this article is as follows.
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Definition Of Direct Expenses
Direct expenses refer to the expenditures that are associated/involved directly in the process of the production of a product or the provision of its services after the product is produced. These kinds of expenditures can be easily traced and identified because they are confined to a particular department and task force. Since direct expenses are chargeable expenditures, they are debited to the direct expenses account.
Direct expenses are the one of aspects of financial statement data that help in recording the expenditures in a business. They are necessary to get operate so that the gross profit of the company can be computed/evaluated. Further, they help to know considerable expenditures of goods and services.
Some examples of direct expenses are as follows.
- Direct substance commission
- Rental expenses for renting equipment
- Salesman Salaries
- Manufacturing Supplies
- Expenses for repairing and maintenance of a plant
On the other hand, all other expenses that are not associated with direct wages, direct materials/tools, or direct expenses are called indirect expenses. These are the costs that not only benefit one specific department of the business but the entire entity as a whole. They may or may not be allocated to a particular cost unit or cost center. The two types of indirect expenses may be as follows.
- Factory Indirect Expenses- The indirect expenses that occurred at the time of production are known as factory indirect expenses. For Example, indirect labor wages, insurance, expenses on indirect raw materials, devaluation charged on buildings, rent, taxes, etc.
- Administrative Expenses- The expenses that are associated with administration actions are known as administrative expenses. For example, Salaries, repairing and maintenance charges, electricity bills, office expenditures, etc.
Difference Between Direct And Indirect Expenses(With Table)
|Basis For Difference
|It refers to the expenses that are outrightly incurred in the production of goods and services.
|All other expenses that cannot be outrightly associated with the cost of production or to a specific cost center, are known as indirect expenses.
|Purpose Of Calculation
|To know the gross profit of a business entity.
|To know the net profit of a business.
|It is compulsory to see the actual expenditure of production.
|It is compulsory to know the income statement of an entity.
|Debit side of the trading/business account.
|They appear on the debit side of the profit and loss account.
Key Differences Between Direct And Indirect Expenses
The major differences between direct and indirect expenses are as follows.
- Direct expenses refer to the expenditures that are associated/involved directly in the process of the production of a product or the provision of its services after the product is produced. On the other hand, all other expenses that are not associated with direct wages, direct materials/tools, or direct expenses are called indirect expenses.
- While direct expenses can be easily traceable because they are constricted to a particular unit(department), indirect expenses cannot be traced properly as they are allocated to different departments.
- Direct expenses are reported on the debit side of the trading account. On the other hand, indirect expenses appear on the debit side of the profit and loss account.
- Direct expenses change according to the unit produced/consumed so they can be also known as variable expenses. On the other hand, indirect expenses do not change as per unit produced or consumed so they can be labeled as fixed expenses.
- Direct expenses are associated with factory-related expenditures and are compulsory to understand the actual cost of the goods. On the other hand, indirect expenses that are office-related expenses are compulsory to know the income statements of an entity.
So, with the above concepts, we can conclude that both direct and indirect expenses are crucial to track the inflow and outflow of money that a business has to consider. Tracking expenditures assists a company to perform smoothly. Direct expenses assist a business in tracking the expenditures of factory production and play a significant part in calculating gross profit. On the other hand, indirect expenses help in recording office-related expenses and are debited in the profit and loss account.