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.
So, what’s the difference between direct expenses and indirect expenses anyway?
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
Examples of direct expenses include:
direct labor – i.e. the cost of paying employees to produce your products;
direct materials, including raw materials;
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.