Direct cost

A direct cost is a cost that is directly attributable to the manufacture of a product (or provision of a service).

A good example of a direct cost is the cost of the materials needed to make a product. The usage of the materials is directly related to the manufacture of the product.

Direct costs are very often variable costs and vice-versa, but the two are not synonymous: for example, the costs of running machinery used in manufacturing are not direct costs, but they are likely to be variable or semi-variable.

There are three types of direct cost:

• direct materials,
• direct labour, and
• direct expenses.

The last is anything that does not fall into the other two (commoner) categories.

A method for tracking the cost of materials needs to be chosen: usually FIFO or LIFO, sometimes average cost or replacement cost.

The sum of all three types of direct costs is called the prime cost.

Any cost that is not a direct cost is an indirect cost.