Direct And Indirect Costs Flashcards, test questions and answers

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What is Direct And Indirect Costs?

Direct and indirect costs are terms used to describe the expenses associated with running a business. Direct costs are those that can be easily traced to a specific product or service, while indirect costs are those that cannot be directly attributed to a particular item. Direct costs include raw materials, direct labor, manufacturing overhead and any other expenses related to creating or selling a product or service. These items are typically tracked by the company on its income statement and can be allocated directly to specific products, services or activities. Indirect costs refer to administrative overhead such as accounting and legal fees, insurance, research and development expenses, advertising, rent and utilities. These items are usually not associated with any particular product or service but rather contribute to the cost of doing business in general. As such, they cannot be assigned specifically to an individual product or service but must instead be spread out over all services provided by the company. Both direct and indirect costs play an important role in helping businesses achieve their goals of profitability.