What is the difference between a direct and indirect cost?

Direct costs are defined as expenses that can be directly traced to a specific project, product, or service. This means that there is a clear connection between the expense and the project; for example, materials used in construction can be directly linked to a particular building project.

On the other hand, indirect costs are those expenses that are not directly attributable to a specific project. Instead, they are shared across multiple projects or services. For instance, overhead costs such as utilities, administrative salaries, and general office expenses do not belong to one specific project but support the overall operation of the organization.

Therefore, the distinction lies in the ability to trace the costs: direct costs have a one-to-one relationship with a specific project, while indirect costs are more generalized, supporting multiple projects and business activities. This understanding is crucial in budgeting, accounting, and project management as it helps organizations allocate resources effectively and understand their overall cost structure.