What distinguishes direct costs from indirect costs?

Direct costs are defined as expenses that can be directly traced to a specific product, department, or project. This means that these costs can be directly assigned to a single output. Typical examples of direct costs include raw materials and labor costs that go into the production of a specific item, which allows companies to calculate the exact expenses associated with producing each product efficiently.

In contrast, indirect costs refer to expenses that are not easily assignable to a specific product. These costs are incurred to support the overall operation of the business and include overhead expenses such as utilities, rent, and administrative salaries, which are necessary for production but cannot be traced to a single item.

Therefore, the distinguishing factor is the traceability of the cost. Direct costs are directly linked to a specific product, enabling clear tracking and accountability, while indirect costs are more general and support multiple products or functions of the organization.