What is an Expense?
Expenses may be defined as the cost of service provided to an entity and the notional cost of the use of owned assets. Expenses such as material costs and labour wages can be direct or indirect.
Direct Expenses (or Chargeable Expenses)
Direct expenses are costs that are associated with producing a product or providing a service. Direct expenses can be used to calculate the cost of goods sold (COGS) or operating expenses.
In other words, all expenses identified to a particular cost centre and hence directly charged to the centre are known as direct expenses. In other words, all expenses (other than direct materials and direct labour ) explicitly incurred for a particular product, job, department etc., are called direct expenses.
These expenses are directly charged to the product. Examples of such expenses ate royalty, excise duty, hire charges of a specific plant and equipment, cost of any experimental works carried out specifically for a particular job, travelling expenses incurred in connection with a specific contract or job etc.
Some common examples of direct expenses are as follows:
- Cost of patents and royalty payments
- Hire charges in respect of special machinery and plant
- Cost of unique patterns, designs and tools
- Experimental cost and expenditure in connection with model and pilot projects
- Architects’, surveyors’ and other consultants’ fees
- Travelling expenses to sites
- Inward charges and freight charges on special material
A direct expense in relation to a particular product or job is included in the prime cost. However, direct expenses in relation to cost centres are treated as overheads as far as cost units are concerned.