The difference between direct and indirect cost is that direct cost can be traced directly to a so-called cost objective, such as a product or service, for instance, while indirect cost cannot be directly assigned to a particular cost objective.The individual definitions and example below will further explain the differences between direct and indirect costs:
- Direct Cost
- Indirect Cost
- Difference Between Direct and Indirect Cost
A company produces multi-packs of dog food. Each can of dog food has a direct cost consisting of the cost for the ingredients, the can, the label on the can, the salaries of the workers involved in producing the contents of the can, the canning and labeling, as well as the actual power consumed by machinery during these processes.The same can has indirect cost consisting of the outer packaging of a multi-pack; administration cost, including salaries of administration and managerial staff, equipment, etc; rent for the premises; overall power and other utility costs of the premises, as well as sales and advertising cost, including travel expenses for reps, etc.Each department of the company has direct cost of staff salaries, equipment etc directly involved in running the department, while other business costs are indirect.For the business as a whole, all the cost that is regarded as indirect cost for each individual can or department ultimately becomes direct cost.
