Reviewed by Oct 05, 2020| Updated on
A direct cost is a cost that can be directly related to particular products or services being produced. The cost item, which may be a company, product, or department, can be traced to a direct cost. Direct and indirect costs are the two primary categories of expenditures that may be borne by businesses.
Direct costs are also variable costs which means they fluctuate with rates of output, such as inventory. Some costs, such as indirect costs are more difficult to attribute to any particular product. Examples of indirect expenses include administrative expenses and depreciation.
While direct costs are usually variable costs, fixed costs may also be included. For example, rent for a factory may be directly connected to the production facility. Rent will often be considered overhead. Occasionally, however, businesses may relate fixed costs to the units generated in a given facility.
Any costs involved in producing a good are included as direct costs, even if it is only a portion of the cost that is allocated to the production facility. Here are some examples of the related costs:
• Direct labour • Direct materials • Manufacturing supplies • Wages for the production staff • Fuel or power consumption
Since direct costs can be accurately traced to a product, there is no need to allocate direct costs to a product, department or other objects of cost. Direct costs usually only support one thing. Things that are not direct costs are pooled and allocated according to cost drivers.
When assessing their cost item, direct costs are relatively straightforward. We know that Ford Motor Company (F) produces cars and trucks. The steel and bolts that are required to make a car or truck will be known as direct costs. However, the electricity to the manufacturing plant will be an indirect expense. While the cost of electricity can be connected to the system, it cannot be directly linked to a particular device and is therefore labelled as indirect.