What Is a Direct Cost?

Definition, examples, and the difference from indirect costs.

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Quick answerA direct cost is a cost that can be traced to a specific product, job or department, such as the raw materials used or the wages of workers who make the product. Costs that cannot be traced this way are indirect costs, or overhead.

Prime cost = Direct materials + Direct labour + Direct expenses

Opposite of	Indirect cost (overhead)
Included in	Cost of goods sold
Topic	Cost accounting · Cost classification

Direct cost in plain English

Ask: “Can I point to exactly which product this cost belongs to?” If yes, it is direct. The wood in a chair is direct. The factory’s rent is indirect, because it serves every chair.

Worked example

A workshop makes chairs. For each chair it uses wood costing 20 and assembly labour costing 15.

Direct cost per chair = 20 + 15 = 35. The workshop’s rent is an indirect cost and is shared across all chairs through overhead absorption.

Common mistakes

Assuming a cost is direct just because it is large.
Treating all labour as direct. Supervisors and cleaners are indirect labour.

Frequently asked questions

What is the difference between direct and indirect costs?

Direct costs trace to a single product or job. Indirect costs serve several products and must be shared out.

Are direct costs always variable?

Usually, but not always. A salaried machine operator dedicated to one product is direct but fixed.

What is prime cost?

The total of direct materials, direct labour and direct expenses.

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This page is for general learning. Accounting rules vary by country and standard.