What Are Direct Costs? Definition, Examples, and Types

what is a direct cost

Although the electricity expense can be tied to the facility, it can’t be directly tied to a specific unit and is, therefore, classified as indirect. Basing your product prices based on direct costs alone does have a downside. If you don’t include indirect costs, the price of your product might not be enough to cover all your business’s expenses.

Small Business Resources

  1. Direct costs are expenses that your business can completely attribute to the production of a product.
  2. They may instead be attributable to multiple projects or are incurred to support overall operations.
  3. For example, the costs can be classified based on their traceability, whether they are manufacturing or non-manufacturing, or even based on capitalization.

It can also include labor, assuming the labor is specific to the product, department or project. So, we can say that the money is spent when the cost object exists and is produced. The other significant business cost is indirect costs, which are the costs that can’t be traced to one specific product, such as administrative costs.

what is a direct cost