What are direct costs?

Direct costs are all those expenses incurred by the company directly to produce a good or service. In short, it is that part of the cost of the product that does not require any type of distribution of general costs or allocation of a proportional part of certain costs of the company.

Examples of direct costs

These are costs directly associated with the product, such as:

  • The materials necessary to produce it,
  • The cost of the labor used directly in the production chain,
  • The inputs or materials that are necessary for the production process and are consumed during it.
  • Others staff costs, in case some type of training is necessary for the workers in the chain, or some type of compensation must be paid to any of the workers that are part of it.

Compared to the above, indirect costs are those that are not directly associated with the production of a product or service, but are necessary for the operation of the company producing said product or service. On the other hand, we speak of direct expenses to refer to them directly assignable to certain apartments or company activities. The calculation of costs, both direct and indirect, does not correspond to the financial Accounting, but to management accounting or cost accounting.

The objective of cost accounting is, on the one hand, to calculate the costs of the company; on the other, help the planning and control process; and lastly, provide data to support decision-making. Although in the case of analytical or cost accounting there is mandatory and binding regulation, in the case of cost accounting or management accounting, this is not the case. On the one hand, it is not mandatory to keep cost accounting and, on the other, there are no rules, so everyone can do it in the way they consider most convenient. This also determines that the concepts related to cost accounting, although the idea is clear, are not as uniform as those that are defined in mandatory standards.

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