Direct Cost - Explained
What is a Direct Cost?
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Table of ContentsWhat is a Direct Cost?How is a Direct Cost Used?Fixed vs. VariableInventory Valuation MeasurementAcademic Research on Direct Cost
What is a Direct Cost?
In finance and accounting, a direct cost refers to a cost that can be directly attributed to the production of a good or service. A cost that can be directly accounted for in relation to how a good is manufactured is a direct cost. Generally, direct costs are limited, the most common direct cost is the cost of materials used in manufacturing a product. Costs, such as labor costs, storage costs are not direct costs. In most cases. Some overhead costs which can be directly attributed to the production of a good are classified as direct costs.
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How is a Direct Cost Used?
When accounting for the costs of producing goods and services, direct and indirect costs can be used. When direct costs are costs that can be directly linked or traced to the production of a particular item, indirect costs are non-traceable expenses that are not easily attributable to the production of a good or service. In certain situations, direct costs fluctuate in price, these types of direct costs are considered to be variable costs. Direct costs that can be linked to the production of a particular product can relate to the purchase of materials, commissions, fuel and other items needed for the production.
Fixed vs. Variable
While on many occasions, direct costs are in fixed dollar amount, in certain cases, direct costs are not static or fixed in nature, this means that they change over time. When direct costs are not fixed, it means they are variable costs that fluctuate depending certain factors such as the market situations, quantity be used or production, among others. Also, fixed or variable cost depends on the materials being used, for instance, if gasoline or fuel is used for the production of an item, it might not be gauged using a fixed dollar amount.
Inventory Valuation Measurement
Given that many materials go into the production of goods and services, it is important that strict measures are put in place to monitor different materials as they are purchased at varying different amounts. For a company that uses direct costs, standard inventory valuation measurement must be used to avoid miscalculation of items which will affect the direct costs of production.
Academic Research on Direct Cost