Direct & indirect costs (bookkeeping)

What exactly are the differences between direct costs and indirect costs?

Why bother?

There are surely more reasons to distinguish between direct and indirect costs. However, for me there is basically one reason: To have a better grip on cost-price calculations:

When figuring out whether a product or service is profitable, it first has to cover the associated direct costs: You won't make an overall profit if you don't first cover the direct costs
There is usally more control over direct costs than over indirect costs, so let's focus on that first in any cost-price calculations.

A second reason for distinguishing between these two categories: Because this is how it is done in profit & loss statements.

Direct costs

Direct costs are expenses that can be attributed directly to the production of goods or services:

Material

Raw materials used in manufacturing a product. E.g:

The canvas that a painter uses for a painting that she sells to a customer
Paintbrushes used by a painter - But only if these brushes can be attributed to specific jobs. If she uses one brush for all jobs over several years, it would be an indirect cost.

Labor

Wages for workers who are directly involved in the production process

Direct Expenses

Costs incurred specifically for a project, product or service, such as special tools or equipment needed for a job. E.g.:

I run several webservers, one of which is for a specific customer. That's a direct cost
Domain names that I register for my customers

Indirect costs

Indirect costs are expenses that cannot be traced directly to a specific cost object. These costs are incurred to support the overall business operations and are shared across multiple projects or products. E.g.:

An iPad used by a painter for all her jobs during the 5 years that she uses that device for all her jobs
A webserver that is shared amongs several customers
Costs of my checking bank account.

Grey area

Let's explore some grey area:

Mixed-used webserver

I have a webserver that is used for 70% by one customer, for 15% by 5 other customers, and for 15% by myself:

The portion of the web server cost that corresponds to the usage by the specific customer (70%) can be considered a direct cost. This is because you can directly allocate that portion of the cost to that customer’s project or services. Additionally, this 70% is significant enough (several hundred euro per month) to be considered a direct cost. As mentioned earlier in this article: Distinguishing between direct and indirect costs, can help with cost-price calculations
The remaining 30% of the server cost, which is used by the other five customers and myself, would be classified as an indirect cost. This portion cannot be directly traced to any single customer and supports the overall operations of the business. Additionally: These costs are not significant enough to make fuss about.

A supplier can be both

Example: Sucontractor B. usually only works for customer X.. However, recently, he did a job for me specific: In the bookkeeping, there is therefore an account B. - direct and an account B. - indirect.