In business accounting terms, what is direct costs and what is indirect costs? These terms pertain to the different types of expenses that are incurred when doing business. Direct costs are those that are directly related to a specific cost object. Indirect costs can also be classified as an indirect cost when certain overhead expenses that are related to the business can also be classified as an indirect cost.
When looking at what is direct costs, overhead that is related to the company’s growth or operations should be classified as direct costs. Initial delivery, for example, is what is called an indirect cost. The time it takes from deciding to invest in building a new building or acquiring another space to when the actual building or other space is ready to use is indirect cost. Although it is not necessarily an expense, it can be categorized as such because it is part of the growth equation of any business. Initial delivery does not include in what is direct costs the time it takes to train employees who will operate from the space.
What is direct costs can also include what is called an indirect cost when it comes to making improvements that will increase the productivity of the business. For example, if employees are able to perform their job duties with increased efficiency, they will not need to spend time taking restroom breaks. The indirect cost of increased bathroom breaks can be calculated. This will include the portion of time the employees need to commute, the money spent on advertisements, the amount of gas used and the wear and tear on vehicles.
Direct what is direct costs can also include what is known as an income tax cost when the company purchases its property or when it sells any property it owns. In both situations, what is the indirect cost turns out to be an income tax cost later on. The tax accountant will add back the profit made from the transaction to what is direct costs and subtract what is called a deferment charge. This is a fee that has to be paid by the company that is doing the selling or purchasing.
When a company decides what is direct costs and what is indirect costs, the question of what is the indirect cost is irrelevant. If a tax accountant has calculated that there is a deferment charge then there is no longer an expense. However, this calculation is used to calculate the cost of property or the cost of equipment. A tax accountant needs to be careful about what is direct costs and what is indirect costs.
The accounting for what is direct costs is usually referred to as costing function. There are basically two kinds of what is direct costs. One is a fixed cost that is already measured and the other is an asset-based cost that depends on future prices. It is important for a company to know what is direct costs so that they can make the necessary adjustments in their operations.
Usually what is direct costs refers to the amount paid for an item or service directly. This type of cost is usually identified as a labor or man-hours based cost. The indirect costs refer to what is indirect in nature and is normally described as a facility-based cost or an inventory-based cost. The indirect costs must be measured and controlled in order to determine the amount of profit that the company is able to generate and in turn, allow it to survive. The indirect costs must also be identified and controlled so that the business is able to maximize its profit and the growth of its business.
Most businesses encounter what is direct costs at some point in their operation. It may seem that they are a minor cost but what they do is accumulate over time and become a major cost when not addressed properly. Proper cost accounting techniques and accurate information to enable the company to properly address these issues and manage them so that they do not exceed their capacity and become unmanageable. Proper costing techniques and the accurate identification of indirect costs will enable the business to achieve maximum return on investment and live within their means.