Direct expenses and indirect expenses are two different terms of accounting which represents the expenditure in a business. Both, direct expenses and indirect expenses, are performed for the convenience of maintaining accuracy in the financial statement report of a business.
Direct vs Indirect Expenses
The main difference between direct expenses and indirect expenses is that direct expenses are traceable. They are confined to a particular department and are restricted only to benefit that specific department. These expenses are connected to all factory expenditures whereas indirect expenses are none traceable, as they are not administered to any particular area.
Direct expenses are restricted in the daily performance of a business. These expenses are related to all office expenditures in a business.
Direct expenses are those expenses that are conclusively bound to the generation of a product. These are the expenses that are utilized before the manufacturing of material and also during the production of a material. It is an all factory expense.
Indirect expenses are those expenses that are not bound to the expense of production. These expenditures are utilized to regulate business. All the expenses that are required to run a business smoothly are known as indirect expenses. It is an all office expense.
Comparison Table Between Direct and Indirect Expenses (in Tabular Form)
| Parameter of comparison | Direct expenses | Indirect expenses |
|---|---|---|
| Meaning | The expenditures that are connected to the production procedure or investment of goods. | The expenditures are not connected to the cost of production or procedure of production. |
| Purpose of calculation | It is calculated to know the gross profit of the business. | It is calculated to know the net profit of the business. |
| Cost of production | These are included in the expense of goods sold or manufactured. | These are included in the expense of rents, taxes, utility expense, etc. |
| Financial Statements | They are posted in the business account. | They are broadcasted in the profit and loss report. |
| Pertained to | These expenses associated with the factory. | Office-related payments allied with indirect expenses. |
| Necessary for | It is necessary to know the actual expenditure of production. | It is necessary to know the income statement of the business. |
What are Direct Expenses?
Direct expenses are the expenditures that is used in the process of creating a product and its services after the product is manufactured. These expenditures are traceable as they are restricted to a specific department and workers.
Direct expenses are a part of the financial statement record of a business which is done to keep a track of the expenditures in a business. The sole purpose of direct expenses is to assist one office. Direct expenses are constantly operated to specify the rate of the merchandise or service.
Direct expenses fluctuate with the rate of production but are consistent for each unit of production and occur usually under the supervision and accountability of the department manager. Businesses that manufacture their own commodities will select the rate of the materials to direct expenses.
Direct expenses are operated to evaluate the gross profit of the company. These expenses are necessary to know the substantial expenditure of a product. These expenses are used to classify and administer expenditures between departments. Some examples of direct expenses comprise immediate labour, direct substances commission, manufacturing stocks.
What are Indirect Expenses?
Indirect expenses are not bound to the expense of production. It is all office expenditures. They exist in the daily process of a business. They cannot be traced as they are not administered to one particular department.
Indirect expenses are not incorporated in the costs of a commodity. They are operated to evaluate the net profit of a business and it is necessary to know the income statement in business. All office related expenditures are allied with indirect expenses.
Indirect expenses can be a fixed indirect expense or recurring indirect expense. In fixed indirect expense, the rate of expenditures are fixed and it is in the process during the period of a project whereas recurring indirect expenses are paid on a recurrence basis.
Factory indirect expenses are the expenses that occur at the time of production. Administrative indirect expenses are the expenses that are related to organizational actions. Selling and distribution indirect expenses are the expenditures that are supervised by the sales committee from the time a product is created completely until it catches up with the distribution.
Main Differences Between Direct and Indirect Expenses
- Direct expenses are associated to the manufacturer related expenses of a company whereas indirect expenses are related to the office related expenses of a company.
- Direct expenses are traceable as they are confined to a particular department and indirect expenses are not traceable as they are not related to a particular area.
- Direct expenses are operated to evaluate the gross profit of a company and indirect expenses are operated to evaluate the net profit of a company.
- Indirect expenses are included in the expenditures of goods sold or manufactured whereas indirect expenses are included in the expenditure of rent, taxes, utilities.
- Direct expenses are related to the factory related expenses and it is necessary to know the actual cost of a product whereas all office-related expenses are allied with indirect expenses and it is necessary to know the income statement of a company.
Conclusion
Both, direct and indirect expenses are recorded by a company to track the flow of money the company has to deal with. To run a company smoothly it is very important to record the expenditures the company has to go through and these expenses provides advantages in the matter of taxes when the company has to pay.
The direct expenses help in recording the expenditures of the factory production and the indirect expenses help in recording the expenditures of office which are shared by all the departments. The direct expenses are easy to manage while preparing a statement record as they are confined to a specific department and it is a bit hard to manage indirect expenses as they are shared by all the departments and not just a particular department.
References
- https://www.sciencedirect.com/science/article/pii/S0885392402005973
- https://www.jacionline.org/article/S0091-6749(02)87113-5/fulltext