Is depreciation a direct or indirect expense?
3. Examples of depreciation as direct and indirect expense
As we noted above, depreciation represents a direct expense when it is attributable to a specific cost object. Some examples of depreciation as a direct expense are listed in the table below:
Industry |
Cost Object |
Equipment Directly |
Oil and gas mining |
Oil and gas division |
Drilling rigs |
Well-boring |
Water well division |
Drilling rigs |
Pasta factory |
Pasta manufacturing department |
Flour mixer |
Footwear manufacturing |
Footwear manufacturing department |
Sewing machine |
Car manufacturing |
Car manufacturing division |
Assembly line |
Construction company |
Building construction department |
Cranes |
Software company |
Big data management division |
Servers |
In case fixed assets are not exclusively associated with a cost object, their depreciation is classified as an indirect expense. Such expense is allocated, apportioned and absorbed by the company either as part of inventory cost or other operating expenses. For instance, sewing machines for attaching zippers may be used for handbags, backpacks, pullovers and boots (i.e., cost objects), and depreciation of the machines may be allocated to these cost objects. A respective cost driver should be used in this case to determine the depreciation expense per the unit of cost driver; the determined rate is then used to “assign” depreciation cost to units of production (i.e., cost objects).