Dr. Paul Borosky, DBA, MBA
Business Consultant · Accounting and Finance Glossary
Direct vs Indirect Costs: What Is the Difference?
Direct costs follow the job. Indirect costs keep the lights on. Miss either one and the price is wrong. With a custom cabinet shop as the example, Dr. Paul Borosky, DBA, MBA, shows how to spread overhead across jobs and offers the quick check he uses as a business consultant to see whether prices cover the whole business.
Questions? Call or text (321) 948-9588. Dr. Paul answers personally.
Last Updated: 11/07/2026 · Written by Dr. Paul Borosky, DBA, MBA
The Short Answer
What Are Direct and Indirect Costs?
Does Your Price Cover Everything?
In Plain English
Can You Trace It to the Job?
The test is simple. Can you trace this cost to this product or this job? If yes, it is direct. If it supports everything, it is indirect.
Your price might cover the flour and miss the oven. That is how a business can win every job and still lose the year.
A Real-World Example
The Cabinet Shop Where Every Job Looked Profitable
A custom cabinet shop in Pittsburgh, Pennsylvania prices each job by its materials, installer hours, and the owner’s design hours for that job. Those are all direct costs.
The quotes leave out the shop rent, the insurance, the owner’s sales and office time, and the design software. Every job looks profitable. The year does not. The owner adds an overhead rate to every quote and stops taking the jobs that cannot carry it. Any construction or remodeling business faces the same trap.
From Dr. Paul’s Fabled Forest
Louie Waffles and the Price Card
Every Sunday, Doctor Owl took the same stool at Waffle Woofs Bakery & Café and ordered the same blueberry waffle. This Sunday, Louie Waffles slid a brand-new price card across the counter, tail wagging.
“Every waffle covers the batter, the berries, and the plate,” Louie said proudly.
Doctor Owl studied the card. “And who pays for the waffle iron? The rent on the café? The lamp oil that keeps the place bright?”
Louie’s tail stopped. “On the house!” he said, out of habit.
Doctor Owl set down his fork. “The house is exactly who is paying.”
That afternoon they added up the café’s monthly costs, spread them over every waffle Louie sold, and wrote a new price card. Louie kept the blueberry waffle on it. He just stopped giving away the café with it.
Want more lessons like this? This story comes from Book 2 of Dr. Paul’s Fabled Forest Business School Series.
Dr. Paul’s Insight
Dr. Paul sees underpricing start here more often than anywhere else: the price covers the product, not the business.
Put It to Work
Direct vs Indirect Costs, Side by Side
| Direct | Indirect | |
|---|---|---|
| Can you trace it to this product or job? | Yes | No |
| Examples | Materials, packaging, labor and design time spent on this job | Rent, insurance, software, sales and office time |
| Shows up in | The cost of each job or unit | Overhead spread across all jobs |
Gray area: production overhead, such as factory rent or equipment wear, can be assigned to inventory and later show up in cost of goods sold. Direct and indirect is about traceability, not about which line of the income statement a cost lands on.
A waffle has $1.10 in direct costs. Indirect costs are $3,000 a month, spread over 2,000 waffles, which adds $1.50 to each one. The full cost is $2.60. A $3.00 price leaves $0.40 per waffle, not the $1.90 it looked like.
Watch Out
Pitfalls When Separating Direct and Indirect Costs
The job pays for itself and leaves nothing for the business that made it possible.
Use a realistic number of units or jobs, not your best month.
If you can trace it to the job, charge it to the job.
Your hours on a job are a cost, even if you do not pay yourself by the hour.
Why It Matters
Benefits of Knowing the Difference
- Prices that cover the whole business
- A clearer gross margin
- Better bids and quotes
- Fewer jobs that look profitable but lose money
In Your Business Plan
How Direct vs Indirect Costs Shows Up in a Business Plan
Lenders want to see that your prices cover more than materials. Clear cost assumptions show that the business can carry its own overhead.
Sample plan excerpt: Financial Plan, Cost Assumptions
“Direct costs (ingredients, packaging, and production labor) are projected at 37 percent of sales. Indirect costs, including rent, insurance, and administration, total $3,000 per month and are covered at a projected volume of 2,000 units.”
FAQ
Questions Owners Ask About Direct and Indirect Costs
Is labor a direct or indirect cost?
Is rent a direct cost?
How do you include indirect costs in a price?
More From the Series
Keep Building Your Business
Every book in Dr. Paul’s Fabled Forest Business School Series teaches one subject through short stories, real terms, and one-page worksheets.
Dr. Paul Borosky, DBA, MBA
Dr. Paul is a business consultant and author with 14+ years of experience and 1,000+ written business plans. He works with owner-run small businesses on plans, financial projections, and the systems that let a business run without the owner doing everything. This page is part of the glossary for Accounting and Finance for Small Businesses, Book 2 of Dr. Paul’s Fabled Forest Business School Series.
This page is for general educational purposes only. It is not tax, legal, accounting, or other professional advice. For decisions about your own business, consult a qualified professional.