What is a direct cost?

Defintion

Direct cost refers to expenses that can be specifically and easily linked to a particular product, project, or activity.

What are directs costs?

These costs are directly tied to the production or creation of a specific good or service and can be traced back to a particular cost object. Direct costs are typically variable, meaning they vary in proportion to the level of production or activity.

Examples of direct costs:

Direct materials: The cost of raw materials that can be directly traced to the production of a specific product.
Direct labour: The wages and benefits of employees directly involved in the production of goods or the provision of services.
Direct expenses: Other costs that can be directly attributed to a specific product or project, such as specific equipment costs, subcontractor fees, or travel expenses.

Direct costs are a component of the total cost of producing a product or delivering a service. The total cost also includes indirect costs, which are not easily traceable to a specific cost object.

Understanding and accurately accounting for direct costs is important for businesses in determining the true cost of producing goods or services. It helps in setting appropriate pricing, assessing profitability, and making informed business decisions.

Direct vs. indirect costs

Direct costs are expenses directly attributable to a specific product, service, or project, such as raw materials, labor, and manufacturing supplies. These costs can be easily traced and assigned to the cost object. Indirect costs, however, are not directly linked to a single product or service and include expenses like utilities, rent, administrative salaries, and office supplies. Indirect costs support overall operations and are allocated across multiple cost objects.

Example of direct cost

Imagine a company purchases steel, rubber, and gears to manufacture bicycles. The cost of these materials can be easily attributed directly to the production of each bicycle. Suppose the company buys £500 worth of raw materials to manufacture 10 bicycles.

Direct cost per bicycle = Total cost / Number of bicycles = £500 / 10 = £50

In this case, the direct cost per bicycle is £50.