When estimating the costs of a cost object, direct costs are allocated and indirect costs are traced to the object.

Direct Costs

Direct costs are expenses that can be directly attributed to a specific cost object, such as materials and labor directly involved in producing a product.

Indirect Costs

Expenses not directly tied to the production of a product or service, such as rent, utilities, and administrative salaries.

Cost Object

Any item for which a separate measurement of costs is desired, such as a product, service, project, or department.