Direct cost

The direct cost is one that can be measured and assigned directly and unequivocally to a specific product. It is a category of cost classified according to its relation to production.

Direct cost

They are the costs that are very clearly attributed to a product in order to know its unit cost and for which it is not necessary to establish any allocation criteria between different products because their individual economic distribution is obvious.

Direct cost types

The most common types of direct costs are:

  • Raw material: These are the materials that are part of a product. In the manufacture of a door it would be wood, hinges or screws. To make a door it is easy and intuitive to know how much quantity of raw materials you have used and their price.
  • Direct labor: Personnel directly related to the manufacture of the product during 100% of their time worked. Continuing with the previous example, it would correspond to the salary of the worker who is putting the hinges or painting the wood.
  • Others: Containers, transport by unit, packaging, etc.

We must consider that the costs can be direct or indirect depending on the sector in which the company operates, and even depending on the organization that each company has. It may be that a cost is direct to one company and yet is an indirect cost to another company.

For example, if a firm manufactures a single product, the cost of renting the factory would be a direct cost since it would only have to be distributed among the units produced. But a company that manufactures different products should classify the same cost as indirect cost, since it would have to apply an imputation criterion for each product.

Direct cost example

Let’s imagine a company dedicated to the manufacture of leather shoes and sports shirts. Determine if the costs listed below are direct costs:

  • Leather: Yes. Leather is a raw material used solely for shoes and it is possible to quantify exactly how much leather each shoe needs.
  • Fabric: Yes. Fabric is a raw material used only for T-shirts, and it is possible to quantify exactly how much fabric each T-shirt needs.
  • Laces: Yes. Laces are raw material and it is known how many laces each shoe has.
  • Machinery depreciation : No. In this case we are manufacturing two products and it is not easy to quantify how much of the depreciation we can allocate to each product. It could be done by machine hours used or by quantities produced, for example.
  • Factory rental: No. It is the same case as the depreciation of the machinery.
  • Sales personnel salary: No. It is not personnel directly related to the manufacturing process.
  • Salary of the person in charge of adding the laces: Yes. It is personnel directly related to the manufacture of shoes and, therefore, we can distribute their salary among the number of shoes manufactured.