Direct Cost

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By the term direct cost we mean that the coat which we can trace directly for producing specific services or goods. Direct cost is associated in producing specific project, activity, product or department. The cost included in direct cost is direct material and labor cost. These direct costs are used for delivering any service or making any product. We can also call direct cost as a hard-cost. A direct cost starts right from the cost which is incurred, by a business, in development and research, through campaigns of marketing and sales to the manufacturing of various forms of services and goods.

Types of Direct Cost

There are 3 types of direct cost which is incurred by a business entity, i.e. direct-material cost, direct-labor cost and direct-expenses cost. All these direct costs are mentioned in detail here-under:

  1. Direct-material cost – It includes cost of all the materials which forms finished good's integral-part and these materials can be traced out readily in a finished good, as having a physical existence. Let us take a computer manufacturing company as example. Here the manufacturer includes computer's plastic-housing, monitor-screen's face, circuit-boards inside the machine, & so on. Minor raw material like solder, wires etc. although are important in manufacturing process but cannot be traced out in the finished product and therefore such type of items cost is called as indirect-material cost.
  2. Direct-labor cost – This type of direct cost includes the gross-wages which are paid by the business entity to all those employees who directly and physically work for producing the goods. For e.g. wages which is given to a welder working in the factory of bicycle, for fabricating bicycle's frames will be considered as direct-labor cost. Wages which is paid to all those employees who are engaged directly in manufacturing a product is said to be direct-labor cost. Whereas if wages are paid to guards or supervisors then this does not in the category of direct-labor costs, it is indirect-labor cost. This is so because they are not working directly for manufacturing a product.
  3. Direct-expenses cost – It is also said as manufacturing overhead. This cost consists of all those costs incurred in manufacturing a product except direct-labor and material cost. It refers to the expenses incurred in running a factory. For example, depreciation relating to the factory, rent, electricity, gas, repairs, utilities, taxes, insurance and maintenance. These are those expenses that one can identify it in a specific cost-center & therefore are charged directly to those cost centers. Few e.g. of direct expenses includes royalty, equipment's or plant's hire-charges, excise-duty etc.

The direct cost comprises of all those cost which are involved directly in manufacturing or making any service or product. With cost-of-goods-sold is associated direct cost. Direct cost is calculated in different manner in different businesses. Direct cost varies from business to business.

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This article was published on 2011/08/22