The Difference Between Indirect and Direct Costs and Why That Matters
There are five terms you need to know when it comes to your Income Statement:
Cost of Goods Sold are direct costs. The expenses are directly associated with the sales. If you sell a product, these are the costs associated directly with that product.
General & Administrative costs are indirect costs. These are expenses that occur whether or not you make a sale. For example, office rent would be an indirect cost.
Gross Income: This is the total amount of sales you take in.
Cost of Goods Sold: This is the amount of costs you have that are associated with the sales.
Gross Profit: Sales – Cost
General & Administrative: Expenses that occur whether you sell something or not.
Net Income: Gross Profit – (General & Administrative)
These are important distinctions when you are looking at the cost and profit from products. If your business is losing money, it could be because your gross profit isn’t enough, you don’t have enough sales or you have too many indirect costs.
You first need to know what the problem is before you can fix it.
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