What is a direct cost?
A direct cost is a cost that is directly traceable to the production of goods and services.
Direct costs can typically include:
- Direct materials used in manufacturing
- Direct labour
- Direct expenses e.g. a royalty
- Payment to a patent holder for a specific production process
They usually are attached to one cost item, such as a department, product or project, on a balance sheet.
Where have you heard about direct costs?
Accountants break down costs of production into direct and indirect costs on balance sheets. Unlike direct costs, indirect costs cannot be pinned to a specific cost item. Often called overheads, they include the price of maintaining the whole company.
What you need to know about direct costs.
If a business correctly allocates its costs to direct and indirect costs, it can price its products more accurately, improve its budgeting and be more attractive to investors.
Direct product costs are variable because they increase in total if more units of products are made.
Many grants from government and foundations stipulate that funding is allocated in specific amounts to direct and indirect costs so it is important to know which costs are which.
Find out more about direct costs.
To understand how tracking direct costs is an important part of an accountant's job see: http://www.accountingcoach.com/blog/indirect-cost-expense.