Direct Costs

Direct Costs Accounting

Our General Ledger prudently segregates expenditure into two primary categories: direct and indirect costs. The distinction lies in their association with the production process—direct costs are tied directly to the creation of products or services, whereas indirect costs (overhead) are not.

The classification into direct costs is pivotal for accurately determining the cost of manufacturing, which feeds into the crucial calculation of the cost of goods sold (COGS). This specific categorization includes all expenses that a business incurs directly as a result of production or procurement activities.

To cater to businesses with varied operational structures, our platform identifies five distinct categories for direct costs:

1. Manufacturing: Involves costs like raw materials, direct labor, factory overhead, packaging, and equipment maintenance—each a variable directly contributing to the production process.

2. Manufacturing and Trading: Encompasses all manufacturing costs, along with additional expenses related to the sale and distribution of products.

3. Stand-alone Trading: Comprises the cost of goods purchased for resale, shipping, and other expenses directly linked to the trading activity.

4. Stand-alone Service: Involves direct labor costs, the cost of supplies, and other expenses directly incurred in the provision of services.

5. Diversified Operations: Tailors direct cost tracking for businesses engaged in a combination of manufacturing, trading, and service provision.

Upon initiation with our services, your business type selection within the app settings will prompt the assignment of the appropriate direct cost cluster to your organization. This ensures the General Ledger reflects an accurate direct cost structure, customized to your specific business activities.

Examples of Direct Costs

Manufacturing Entities may see direct costs such as:

• Raw materials: The cost associated with materials used in creating the final product.

• Direct labor: Wages for personnel directly involved in production.

• Factory overhead: Indirect production costs like utilities and maintenance.

• Packaging and shipping: Expenses for materials and delivery of the final product.

• Equipment maintenance: Costs for upkeep and repair of machinery.

Manufacturing and Trading Entities often include costs like:

• All manufacturing costs listed above.

• Cost of goods sold (COGS): The cumulative cost of products sold, including acquisition and production expenses.

• Freight: Transportation expenses from the production site to the customer or distribution center.

Trading Companies typically account for:

• Cost of goods sold (COGS): Purchase costs of products for resale.

• Freight or shipping: Transportation expenses from supplier to business.

• Customs duties: Tariffs on imported goods.

• Warehousing: Storage expenses for inventory.

• Packaging costs: Expenses related to product transport.

Service Companies generally include:

• Labor costs: Compensation for employees providing services.

• Supplies cost: Materials used in service delivery.

• Travel expenses: Costs incurred for service provision at client locations.

• Subcontractor fees: Payments for third-party services.

• Equipment depreciation: Value reduction of devices used in services.