Direct Cost Definition and Example
Direct Cost Definition – Costs directly attributable to the manufacture of a product or the delivery of a service.
In simple words, direct costs are directly attributable to the production process. The total expenses of the business consists of two costs. These are direct and indirect costs.
Direct costs mainly arises with start of the production process. Some of the examples are direct labor cost, wages, raw material cost, etc. On the other hand, indirect costs are those cost which business incurs even when there is no production. Examples are minimum electricity bill charges, salaries, etc.
Direct Cost Example
In order to understand the direct cost definition more clearly, let’s discuss an example.
ABC Ltd is a company involve in manufacturing ready – made garments. Now the company pays the bills which are like these –
Salaries – 10,000
Wages paid to labor – 5,000
Direct material – 15,000
Electricity expenses – 5,000
So , the direct cost here are – wages of labor, direct material. All other costs are indirect costs.
Related Financial Terms of Direct Cost
Difference between Direct Cost and Indirect Cost
Direct costs are directly attributable to the cost of an object. Whereas indirect costs is not attributable to a single cost object.
Direct cost applies to a single project whereas indirect cost applies to multiple project. In addition to this, total of direct cost constitutes prime cost. On the other hand, total of indirect cost known as overhead cost.