Direct Cost

Direct Cost refers to the cost that can be directly traced to producing specific goods or services. Direct costs are associated with producing a specific product, project, department or activity. A direct cost includes cost of direct labor and material used in making the product or delivering the service. Direct costs are also known as hard costs. The direct costs start from costs incurred in Research and development, through sales and marketing campaigns to production of different types of goods and services.

Direct costs are of three types. They are

• Direct materials
• Direct labor
• Direct expenses

The direct costs include the costs that are directly involved in making or manufacturing of the product or service. Direct materials include costs such as raw materials, standard and specialized parts, and sub-assemblies required to assemble or manufacture a complete product. Direct material costs are associated with a specific product, cost center, or work-order. Direct labor includes costs or expenses which are paid to the employers or workers who are directly involved in the making of a product. Direct labor includes costs such as the wages of the assembly workers in an assembly line. Direct expenses are the expenses which can be identified to a particular cost centre and hence directly charged to the centre are known as direct expenses. Some of the examples of direct costs are royalty, excise duty; hire charges of a specific plant and equipment.

The direct costs will be evaluated differently in various businesses. Depending upon the structure of the business the hard cost considered in one business may be considered as indirect in another. Direct cost is associated with the cost of goods sold. When the internal guidelines of a company are consistent the direct costs can calculate the historical costs and also compare absorption costing from one period to another.

Questions:

• What is direct cost?
• What are the various types of direct costs?