Direct Cost Definition
Direct cost is an accounting term referring to expenses tied to a specific cost object, such as a product or service. These costs are directly caused by the cost object.
Direct cost is different from indirect cost, which is not linked to a specific cost object. Indirect costs, such as a factory's rent, support multiple projects or overall business operations. Direct costs are easier to identify and allocate.
More on Direct Cost
Direct costs may be fixed or variable. For instance, direct labor is variable as it depends on the number of workers and their working hours. Some direct costs, like machinery depreciation, are fixed if the machinery is used exclusively for a specific project.
Understanding direct costs is crucial for financial modeling and managerial accounting. It helps in calculating the contribution margin and the break-even point, aiding in sound business decisions.
Direct Cost Examples
- Direct labor: Workers' wages and benefits who directly produce the goods or services.
- Direct materials: Raw materials and components used in the production of goods or services.
- Manufacturing supplies: Consumable items used in production like lubricants, tools, and packaging materials.
- Production staff wages: Salaries and benefits of managers and supervisors overseeing the production process.