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.

Direct cost is closely related to cost of goods sold, but is not necessarily the same (it may be in some businesses). Direct cost is a management accounting measure and can be calculated in the way that the management find most useful. Cost of sales is a financial accounting number and must be calculated in accordance with accounting standards.

In general, direct cost, is measured very narrowly, so related numbers such as cost of sales are likely to be higher as they will include some indirect costs that can be attributed to products.