Certified Government Financial Manager (CGFM) Practice Exam

Direct costs are expenses that can be directly attributed to a specific project, program, or activity. These costs are variable and can easily be linked to the production or delivery of goods and services. Equipment and travel costs are prime examples of direct costs because they are expenses that can be directly tied to a particular project or operational activity. For instance, if a department requires specific equipment to complete a project, the purchase of that equipment is a direct cost. Likewise, travel costs incurred by staff to attend a project-related meeting or training are also classified as direct costs, as they are necessary for the execution of the project.

In contrast, shared administrative services and supplies, interest on debt and facilities costs, as well as overhead and indirect costs, are not specifically allocated to one single project. These expenses cover general operational needs and support multiple functions within an organization, making them indirect costs rather than direct ones. Such costs cannot be directly traced back to a specific project, which is why they differ fundamentally from the direct costs associated with equipment and travel. Understanding the distinction between direct and indirect costs is crucial in budgeting and financial management, particularly in government programs where accurate cost allocation is essential for accountability and efficiency in resource use.