Direct Cost
IntermediateA direct cost is a cost that can be traced directly to a specific product, service, project or department, such as the materials used to make a product.
Direct costs are clearly linked to what they help produce. Typical examples include raw materials used in a product, wages of workers who make it, components purchased for it and sales commissions on it.
For example, a furniture maker can trace the wood, screws and hours of carpentry used to make a particular table. If a table uses 120 of wood and 80 of carpentry labour, its direct cost is 200.
Direct costs contrast with indirect costs, which support many products or activities and cannot be traced to any single one, such as factory rent or the salary of a production manager.
The distinction depends on what is being costed. The salary of a project manager is a direct cost of the project they run, but an indirect cost of each individual product the project delivers.
Knowing direct costs helps businesses set prices, judge the profitability of individual products and decide which lines to expand or drop. Direct costs are often, but not always, variable costs, since they usually rise with the amount produced.
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