Course Outline
Join PRO

Is depreciation a direct or indirect cost?

Harold Averkamp, CPA, MBA

Definition of Depreciation

Depreciation is defined as the systematic expensing of the cost of an asset such as equipment, building, vehicle, etc. over the useful life of the asset.

Definition of Direct and Indirect Costs

The depreciation expense associated with the asset can be direct cost or an indirect cost or both a direct and indirect cost.

Direct costs are traceable to a cost object (department, product, etc.) without any allocation. Indirect costs must be allocated to a cost object since the cost is not traceable to the cost object.

Example of Depreciation Being a Direct Cost and/or an Indirect Cost

Assume a company has a variety of manufacturing departments, one of which is the Finishing Department. The Finishing Department’s equipment is used for producing only one product line, which has three different versions (basic, deluxe, and premier). Each of the three versions uses a different amount of the equipment’s time.

The depreciation of the equipment is a direct cost to the Finishing Department. It is a direct cost because the equipment is used exclusively in the Finishing Department, and therefore does not require any allocation to get it to that cost object. If the annual depreciation on the equipment in the Finishing Departments is $60,000 a year, the $60,000 is a direct cost of the Finishing Department.

The depreciation of the equipment is also an indirect cost of the products using the equipment. It is an indirect cost because the company has to allocate the depreciation to the three versions of the product line that are processed in the Finishing Department. Let’s assume that the allocation is based on the amount of the equipment’s time that was used. If the equipment will operate for 6,000 hours a year, the depreciation could be allocated to the products using the Finishing Department’s equipment at the rate of $10 per hour ($60,000/6,000 hours). If the basic version of the product requires 1 hour, each basic version will be allocated $10. If the deluxe version requires 2 hours, each deluxe version will be allocated $20.

Indirect manufacturing costs are also referred to as manufacturing overhead, factory overhead, or burden.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews



PRO Plus

Lifetime Access (One-Time Fee)
Word Scrambles
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on

Learn More About Harold

Certificates of

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus