Direct and Indirect Expenses: Differences

To know the actual cost of production we classified expenses into two subcategories are Direct and Indirect expenses or cost. and to measure the gross profit on the sale of goods and services. All expenses incurred on the purchase of goods(in the trading business model) or the production of goods(in the manufacture business model) are known as direct expenses or cost but all other expenses are included in the indirect expenses or cost. These are further explained as follows.

Meaning of Direct Expenses: -

The expenses related to the production process or purchase of goods are called direct expenses. In other words, all expenses have a direct relation with the process of production of goods and purchase of goods. These expenses are separated to calculate the Gross profit of the business in a particular financial year. These expenses are differed as per the model of business. We are further classified them into two major subcategories explained as follows: -

1. For the Manufacturing Business model
2. For the Trading Business Model

List of direct Expenses: -

1. In Manufacturing Concern:
   1. Purchase of Raw Material
   2. The wages paid to the factory worker
   3. Factory Staff salary
   4. Factory Lighting and Heating
   5. Freight or carriage inwards
   6. Octroi on the Purchase of Raw Material
   7. Factory rent
   8. Factory utilities
   9. Factory building insurance
   10. Depreciation on Plant and Machine
   11. Equipment setup costs
   12. Equipment Repair and maintenance
   13. Factory supplies
   14. Factory small tools and die charged to expense
   15. Import Duty
   16. Custom Duty
   17. Dock Charges
   18. Fuel, Gas, and Water
   19. Royalty
   20. Packaging Material or charges
   21. Commission on Purchase
2. In trading Concern
   1. Purchase of Goods
   2. Freight or carriage inwards
   3. Octroi on the Purchase of goods
   4. Unloading of goods
   5. Import Duty
   6. Custom Duty
   7. Dock Charges
   8. Packaging Material or charges
   9. Commission on Purchase

Meaning of Indirect Expenses: -

The expenses not related to the production process or purchase of goods are called indirect expenses. In other words, all expenses other than direct expenses are known as indirect expenses. These expenses are separated to calculate the Net profit of the business in a particular financial year. List of Indirect Expenses: -

1. Salary of the office employees
2. Electricity Bill
3. Rent
4. Taxes
5. Freight or carriage outwards
6. Traveling Expenses
7. Printing and Stationery
8. Postage and Telegram
9. Commission paid on Sales
10. Publicity and Expenses
11. Accounting and Auditing Fee
12. Legal fee
13. Office Expenses
14. Repair and maintenance
15. Staff Welfare
16. Group Insurance of employee
17. Depreciation
18. Bad debts
19. Office building insurance
20. Mobile and Telephone Expenses
21. Interest
22. Miscellaneous Expenses

Chart of Difference between Direct and Indirect expenses: -

Basis of Difference	Direct Expenses	Indirect Expenses
Meaning	The expenses related to the production process or purchase of goods.	The expenses not related to the production process or purchase of goods.
Help in Calculation of	Gross Profit	Net Profit
Included in the Cost of Production	These expenses are included in the cost of goods sold or produce	These Expenses are not included in the cost of goods sold or produce
Financial Statement	Posted in the trading account	Posted in the Profit and loss account
Related to	These expenses are related to Factory.	These expenses are related to the office.
Need	Calculate these expenses are needed to know the actual cost of production.	Calculate these expenses are needed to know the actual profit for the year.

Download the chart:

If you want to download the chart please download the following image and PDF file: -

The conclusion of the Difference: -

These both are the different types of expenses one is related to the production process and the second is related to all office and selling processes. Both are important for every type of business. Only to calculate the specific performance of the business in accounting all expenses are classified into two subcategories. Thanks for reading the topic please comment with your feedback whatever you want. If you have any questions please ask us by commenting.  Check out T.S. Grewal's +1 Book 2019 @ Official Website of Sultan Chand Publication