Direct expenses and indirect expenses are two types of business expenses that companies can incur. Here are the key differences between them:

Direct expenses

• These are expenses that can be directly connected to a specific product, department, or project.
• Examples of direct expenses include raw materials, labor, and equipment that are specific to the product, department, or project.
• Direct costs are often variable costs, meaning they fluctuate with production levels such as inventory.
• Direct costs can be traced to the cost object, which can be a service, product, or department.

Indirect expenses

• These are expenses involved with maintaining and running a company, and they extend beyond the expenses incurred when creating a product.
• Examples of indirect expenses include rent, utilities, administrative expenses, and employee salaries that are not specific to a product, department, or project.
• Indirect costs are more difficult to assign to a specific product, department, or project.
• Indirect costs are often fixed costs, meaning they do not fluctuate with production levels.

It is important for businesses to understand the difference between direct and indirect expenses for proper accounting and tax purposes. Direct and indirect expenses can be tax-deductible, but it is important to consult with an accountant or bookkeeper to determine which costs qualify. Properly tracking each type of cost separately can help businesses understand their cash flow and price their items accurately.