How much does QuickBooks support cost

Most business owners realize that tracking costs is an essential part of the budgeting process. New entrepreneurs, however, may not understand the difference between direct and indirect costs, or recognize the importance of tracking each separately.

Not only does categorizing expenses correctly affect a company’s cash flow, but it can also have a significant impact on federal tax payments. In the long run, understanding and tracking direct and indirect costs is a crucial part of keeping your business compliant.

Understanding Direct and Indirect Costs

Companies classify costs as direct or indirect based on whether or not they are used to produce goods and services. Direct costs refer to costs related to producing goods and can be tracked back to a specific object. Typically, direct costs fall under the control of a department manager and are constant for every unit of production.

Most of a company’s direct costs can be separated into direct labor (i.e., the cost of paying employees to produce a product) and direct materials, which include all the raw materials needed to manufacture a particular item. Keep in mind that, in certain contexts, direct costs can also include employee benefits and programs, equipment, travel and consultant services.

While direct costs are typically easy to assign, indirect costs are often far less straightforward. Indirect costs are less about product creation and more about overall company maintenance and growth, and usually not traceable to a single department or product.

Because indirect costs can be incurred jointly across departments, companies often struggle to assign them to a single department or cost center. A company’s indirect costs may include electricity and utilities, distribution and sales, building maintenance and other expenses related to running an office. For this reason, indirect costs are widely regarded as the cost of doing business.