What are direct and indirect costs in a business?

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Account management is essential in a business, and cost control is essential to ensure the profitability and sustainability of any company. In this post we analyze what direct and indirect costs are and the difference between both concepts to optimize the use of resources and make the best decisions.

What are direct and indirect costs?
We are talking about two main categories of expenses that a company incurs when carrying out its activities .

costs of a business
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These categories help classify expenses in a way that facilitates financial planning, cost control, and profitability analysis. Direct costs are those expenses that can be specifically identified and assigned to a particular product, service, project, or department. For example, the cost of raw materials used to manufacture a product.

Indirect costs , on the other hand, are those that cannot be russia phone number lead precisely assigned to a specific product or service . In this case, we are referring to shared expenses that benefit multiple areas of your business. For example, the cost of renting a production plant, administrative staff salaries, or electricity consumption.

Differentiating between direct and indirect costs is very important , and each cost must be classified to better manage your business . The reason is simple: this simplifies the cost structure and the calculation of the profitability of each product or service. In addition, it facilitates the preparation of budgets and the choice of sales prices to ensure an adequate profit margin.

Difference between direct and indirect costs
direct and indirect costs
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Let's look at the main characteristics of each type , so you know how to identify them.

Characteristics of direct costs
These are the main characteristics of direct costs:

They are assigned to a single product or service.
They are easily identified in the production process.
They vary in proportion to the volume of production or sales.
Its control is simpler and more specific.
Examples of direct costs are the raw materials needed to manufacture products, which can vary depending on the volume of units produced, the salary of employees who assemble the parts, the cost of shipping, etc.

Characteristics of indirect costs
The main characteristics of indirect costs are the following:

They cannot be linked to a particular product or service.
They benefit more than one department or project.
They include general expenses such as administration, rent and services.
They require distribution methods (such as the use of allocation criteria) to be assigned to products or services.
Two examples of indirect costs may be the cost of administrative staff, whose work affects all areas of the company, or the rental of the industrial premises or room, since it is a space shared by operators, administrative and security personnel.

At MASMOVIL NEGOCIOS we hope to have helped you understand the difference between direct and indirect costs with examples so that you know how to identify them and apply them in your business.