Direct Costs

These are expenses that can be specifically traced to a particular product, project, or department.

Examples:

• Raw materials used in manufacturing
• Wages of workers directly involved in production
• Equipment used exclusively for a project

Key trait: If you can point to a cost and say, “This was spent because of that product or job,” it’s direct.

Direct costs are used to calculate you gross profit and typically increase and decrease with the level of sales / revenue.

Indirect Costs

These are expenses that support operations but cannot be directly linked to a specific product or activity.

Examples:

• Rent for office space
• Utilities
• Salaries of administrative staff
• Depreciation on shared equipment

Key trait: These costs are shared across multiple products or services and need to be allocated.

You will continue to incur these cost regardless of your operating activity, i.e., if you generate no sales you will still have to pay your rent.

Correct treatment of your direct and indirect costs will give you a better understanding of your financial position in particular your breakeven point.

If you would like to discuss further, please contact us:
 

McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.au

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