Direct and indirect costs: how to tell them apart

A direct cost can be traced to one unit of the product. For Fernhill Furniture, one unit is one table.

An indirect cost cannot be traced to one table. It is shared by everything the workshop makes. Indirect costs are also called overheads.

Direct materials

materials that end up in the product, such as the oak in a table

Direct labour

pay for the time spent making the product, such as the wages of the workers who cut and assemble it

Direct expenses

any other cost of one job alone, such as hiring a machine for one customer's order

Indirect costs

everything else: the supervisors, rent, electricity, insurance

Glue and sandpaper are materials, but the amount used on one table is too small to measure. They are treated as indirect.