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Where Are Direct Costs Listed on Financial Statements?

by Marquis Codjia

Under accounting rules, a business must list direct costs in a statement of


profit and loss, but these charges also interrelate with other financial data
summaries. These include a statement of financial position, a statement of
cash flows and a statement of changes in shareholders' equity—also known
as a report on retained earnings.

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Direct Cost
In a financial glossary, the terms "direct cost," "variable expense," "direct outlay" and "variable charge" are synonyms. A
direct outlay is one that a business can specifically attribute to a project, such as the production of items or the
construction of public infrastructure—think of a toll plaza or highway. Direct costs—which include salaries and materials
—generally change in proportion to activity levels. This contrasts with the scenario you have with indirect costs—like
administrative support, office supplies and insurance—that may not see an outright hike following an increase in direct
costs.

Income Statement Listing


As an operating expense, a variable charge makes it directly into an income statement—the other name for a statement
of profit and loss, report on income or P&L.; The charge typically is integral to the cost of sale, also referred to as cost of
goods sold. This is because the cost of a finished product incorporates things like labor and parts. Don't mistake the cost
of sale for other operating expenses, such as rent, litigation and insurance—all of which go into the "selling, general and
administrative expenses" section of a P&L.;

Other Classifications
You won't see direct costs listed outside a corporate P&L;, but they affect other accounting reports. Variable costs flow
symbiotically into the merchandise account on the balance sheet, also called a statement of financial position. In this
account, direct expenses may be part of raw materials, work-in-process goods or finished items. It all depends on the
specific stage in the production cycle before the reporting company publishes operating performance data. Direct costs
also find their reporting way in the "cash flows from operating activities" section of a statement of cash flows.

Bookkeeping
To record direct costs, a corporate bookkeeper debits the variable-expense subaccount—which is part of the inventory
master account—and credits the costs-payable account. When the business remits funds to workers or pays for raw
materials, the bookkeeper credits the cash account and debits the costs-payable account to bring it back to zero. If you
hear financial specialists talk about crediting the cash account, they mean reducing funds in company coffers.

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References (3)  (#)


About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering
topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia
received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial
management.

Photo Credits
Comstock/Comstock/Getty Images

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