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
Linked to Cost Object

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).

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