As the owner of a startup or small business, understanding the distinction between direct and indirect costs is essential when pricing your products or services. When you know the true costs involved in producing and providing your goods or services, you can price them competitively and accurately. Additionally, many costs are tax-deductible according to current IRS guidance, so properly tracking both direct and indirect costs can help maximize your deductions.
What are direct costs?
Direct costs are expenses that a company can easily trace to a specific “cost object,” which may be a product, department or project. Examples include software, equipment and raw materials. Direct labor is also included, as long as it relates to a product, department or project. For example, when an employee is hired for a project either exclusively or for a set number of hours, their labor is a direct cost. If your company develops software and needs specific assets, such as purchased frameworks or development applications, those are direct costs.
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