Direct Costs

Direct costs are those which can be specifically attributed to, and are essential for, the product or service. They include both short-term costs such as raw materials, labor, machine set-up costs, and long-term costs such as facility rental and depreciation. They are also known as variable costs since they increase as the production level increases and decrease when the production level decreases.

Direct costs are associated with the production and sale of a product or service. They are most often referred to as variable costs, as they can fluctuate depending on the level of production. Direct costs are those that can be explicitly attributed to the product or service, such as raw materials, labor, machine set-up costs, and other costs directly related to producing the product or service. These costs are necessary for the product or service to be created and provided, and will vary depending on the product or service.

Direct costs may also be referred to as ‘prime costs’, ‘first costs’, ‘direct product costs’, or ‘actual costs’. They are usually incurred over a short period, but there can be some long-term costs as well, such as facility rental and depreciation. The types of direct costs vary greatly depending on the industry, but typically they will include the purchase of materials and labor directly related to producing the product or service.

For example, if a manufacturing business produces cars, the direct costs would come from the purchase of raw materials such as steel, aluminum, and other materials to make the car frame, as well as the labor costs of people who work on the assembly line. Other typical direct costs include individual components of the car, such as headlights, wheels, and other parts necessary for the car to operate. This adds up to the total cost of each 'unit' of car produced.

In contrast to direct costs, indirect costs are those that are associated with the entire production process, but are not tied to a specific product or service. These costs may include administrative costs or research & development costs, for example. Indirect costs are spread across multiple products and services, and can therefore have a larger impact on a business's bottom line than direct costs.