What is a Direct Cost?
You may have heard the term direct cost, but what is a direct cost? A direct cost is something that can be easily matched to a cost object. Remember from our blog about classifying costs a cost object is something that we want to track costs for. It can be a project, a product, a client, a location, etc. To read the full overview click here.
Back to a direct cost. A direct cost can be specifically matched to the cost object. Let's take a look at some examples:
A company wants to track the costs for a specific branch. The cost object is the branch of the company. Some direct costs would be the rent associated with the office, the salary of the branch manager, the utilities associated with the location, and the depreciation for the equipment that the location has.
A company wants to track the costs for a specific product. The cost object is the product. Some direct costs would be the materials that go into making that specific product, the cost of the machine operator for the machine that makes that product (if it is the only product that the machine makes), and the cost to run ad an for that specific product.
A construction company wants to track the costs for a specific client. The cost object is the client. Some direct costs would be the materials for the building for the client, the rental of the machinery for the equipment that was rented for that specific client's job, and the labor that was paid for the work on that specific job.
Direct costs are often very obvious, they should be easily associated with the cost object. Next we'll cover indirect costs.