What is the difference between direct and indirect costs?

Direct costs are costs that can be directly attributed to a specific cost object, such as a product, department, or project. These costs are incurred solely because of the existence of the cost object and can be easily traced to it. Examples of direct costs include direct materials, direct labor, and direct expenses related to a specific project or product. In contrast, indirect costs are costs that cannot be directly traced to a specific cost object and are incurred for the benefit of multiple cost objects or the organization as a whole. Indirect costs are typically allocated to cost objects using a reasonable allocation basis, such as labor hours, machine hours, or square footage. Examples of indirect costs include overhead expenses such as rent, utilities, depreciation, and administrative salaries. The key difference between direct and indirect costs lies in their traceability to specific cost objects and the method of allocation used to assign them to those cost objects.