Direct expense is an expense incurred that varies directly with changes in the volume of a cost object. A cost object is any item for which you are measuring expenses, such as products, product lines, services, sales regions, employees, and customers. Here are several examples of direct expenses:
- The materials used to construct a product for sale
- The cost of the freight needed to transport goods to and from a manufacturing facility
- The labor incurred to produce hours billable to a client
- Labor and payroll taxes paid based on the number of units produced
- Production materials consumed during the manufacture of goods
- The commission and payroll taxes related to the sale of goods or services
Direct expenses are typically listed within the cost of goods sold section of the income statement. However, commission expenses are sometimes categorized lower down, in the selling and administrative expenses section of the income statement.
When the income statement is revised to only include direct expenses in the cost of goods sold, this is called a contribution margin income statement.
There are many more types of expenses that are not direct expenses – they are called indirect expenses, because they do not vary with changes in the volume of a cost object. Examples of indirect expenses are:
- Facility rent
- Facility insurance
- Salaried compensation
- Secretarial wages
- Depreciation and amortization
- Research and development