Much like direct costs, indirect costs can be both fixed and variable. Fixed indirect costs include things like the rent paid for the building in which a company operates.

Microsoft says business leaders must empower employees and drive growth through digitalization — but that having digital tools isn't enough for companies to be competitive. They must also undergo a digital transformation of their culture.

Microsoft conducted a global survey of 20,000 people in midsize to large companies in Europe to help businesses understand how to empower employees. Survey results show that merely introducing a new technology doesn't guarantee higher productivity and that businesses with both a digital and positive culture gain the most technologically. The survey also found that when employers give workers innovative tools and nurture a digital culture, employee engagement and productivity go up.

Microsoft recommends that employers "future-proof" their organization by tapping into employees' personal strengths and experimenting and discussing ideas; cultivating talent by enabling employees to do their best work and make a difference; and starting change in their organizations​ from the top, where cultural transformation that promotes a healthy workplace and the effective use of technology begins.

INSIGHT

The Microsoft survey emphasizes the importance of culture in a highly productive, innovative and engaged work environment. Without a cultural or mindset shift towards technology, promoting the value and use of new digital tools to employees will likely create conflict rather than innovation.

Also, not all employees will get up to speed on new technologies at the same time, since some workers will be more tech-savvy than others. Employers will need to communicate the advantages and use of digital tools to make sure everyone is comfortable using them, especially in a five-generation workforce. Trust is a huge part of building a strong digital culture — trust in leadership and in the mission of the company overall.

Employment experts predict a digital disruption for the future workplace, as automation claims jobs. But technology is always evolving and will introduce new jobs, so long as employers remain committed to developing the skills of their employees and adapting to the coming changes.

Culture, or brand, can be an effective tool for attracting and retaining talent. And when technology and innovation are central to an employer's culture, this can be an even greater selling point for job seekers and applicants.

Direct Costs vs. Indirect Costs: Understanding Each

For budgeting and accounting purposes, it's crucial not only to document your business expenses but to classify them properly. The distinction between "direct" and "indirect" costs may appear intuitive and self-explanatory. While it's true neither word takes on a dramatically different meaning when categorizing the various costs of doing business, there's a bit more nuance in practice.

Direct costs are traceable to the production of a specific good or service. The operative word is "specific." Indirect costs may be necessary to production, but they are not traceable to the act of production. Indirect costs are those necessary to keep your business in operation. Think of them as the prerequisites for the production of any specific good or service.

It's important to have a solid understanding of the distinction between direct and indirect costs when pricing your products. When you know the true costs of production, you can price both competitively and accurately. You'll also demonstrate, more clearly, the efficiency of your business practices to potential investors. The distinction is equally important when filing your tax returns. You'll save time, and more than likely, money: Certain costs, both direct and indirect, are tax-deductible.

Direct costs

Direct costs are expenses that a company can easily connect to a specific "cost object," which may be a product, department or project. This includes items such as software, equipment and raw materials. It can also include labor, assuming the labor is specific to the product, department or project.

For example, if an employee is hired to work on a project, either exclusively or for an assigned number of hours, their labor on that project is a direct cost. If your company develops software and needs specific pregenerated assets, such as purchased frameworks or development applications, those are direct costs.

Labor and direct materials, which are used in creating a specific product, constitute the majority of direct costs. For example, to create its product, an appliance maker requires steel, electronic components and other raw materials. Two popular ways of tracking these costs, determining whether and when your company actually uses materials in production, include last in, first out (LIFO) or first in, first out (FIFO). This can be helpful when the costs of materials fluctuate in the course of production.

The majority of direct costs are variable. When direct costs vary, it's because they increase as additional units of a product or service are created. For example, smartphone hardware is a direct, variable cost because its production depends on the number of units ordered. A notable exception is direct labor costs, which are usually fixed, and remain constant throughout the year. Typically, an employee's wages do not increase or decrease in direct relation to the quantity of a product.

Indirect costs

Indirect costs go beyond the expenses associated with creating a particular product to include the price of maintaining the entire company. These overhead costs are the ones left over after direct costs have been computed, and are sometimes referred to as the "real" costs of doing business.

The materials and supplies needed for the company's day-to-day operations are examples of indirect costs. These include items such as cleaning supplies, utilities, office equipment rental, desktop computers and cell phones. While these items contribute to the company as a whole, they are not assigned to the creation of any one service.

Indirect labor costs make the production of cost objects possible but aren't assigned to a specific product. For example, clerical assistants who maintain the office support the company as a whole instead of just one product line. Thus, their labor can be counted as an indirect cost.

Other common indirect costs include advertising and marketing, communication, "fringe benefits," such as an employee gym, and accounting and payroll services.

Much like direct costs, indirect costs can be both fixed and variable. Fixed indirect costs include things like the rent paid for the building in which a company operates. Variable costs include the ever-changing costs of electricity and gas.