What are the differences between direct and indirect costs?

What are the differences between direct and indirect costs?

Direct costs are expenses that can be directly attributed to a specific project or product, like raw materials. Indirect costs, on the other hand, are not directly linked to a single project, such as utilities or administrative salaries.

Can you give me some examples of each?

Sure! Examples of direct costs include wages for workers on a specific project and the cost of materials used. Indirect costs might include rent for the office space or salaries of management.

How do these costs affect pricing strategies?

Direct costs are often factored into the pricing of a product to ensure profitability, while indirect costs can influence overall pricing strategies by affecting the total cost structure.

Why is it important to distinguish between them?

Distinguishing between direct and indirect costs helps businesses allocate resources effectively, set accurate pricing, and analyze profitability.