man paying for an expense on a tablet with a credit card

Direct vs. Indirect Expenses – What’s the Difference? [Infographic]

As a small business owner, it is always important that you track all your expenses, but it’s also important that you track your direct expenses and indirect expenses separately. Tracking your direct and indirect expenses separately will allow you to follow your budget more closely. It will also help you price your products or services more accurately.

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?

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Direct Expenses

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;
  • commissions; and
  • manufacturing supplies.

Indirect Expenses

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.

Examples of Indirect Expenses

Examples of indirect expenses include:

  • salaries,
  • insurance,
  • depreciation of equipment,
  • equipment maintenance,
  • facility rent,
  • utilities,
  • office supplies, and
  • advertising and marketing.

Direct vs. Indirect Expenses at a Glance

infographic of the difference between direct and indirect expenses