Direct expenses are costs that are directly involved in the production, manufacturing, or procurement of goods for resale. These are the essential expenses incurred to make goods ready for sale or bring purchased goods to the business premises. Without incurring these costs, the production or resale activity cannot be completed.
They are recorded on the debit side of the Trading Account and form a part of the cost of goods sold (COGS). These expenses increase or decrease with the level of production or the volume of goods purchased. They do not include administrative or office-related costs, which are classified as indirect expenses.
Key Points:
- Costs that are directly related to producing or purchasing goods.
- Essential for completing production or making goods ready for sale.
- Recorded on the debit side of the Trading Account.
- Directly affect the cost of goods sold and gross profit.
- Do not include administrative, selling, or office expenses.
- Increase or decrease with the quantity of goods handled or produced.
Examples:
- Paid ₹12,000 wages to factory workers for production – direct expense.
- Spent ₹3,000 on carriage inward for materials – direct expense.
- Used fuel worth ₹2,500 for running machinery – direct expense.