Examples of direct costs
/What are Direct Costs?
Direct costs are costs related to a specific cost object. A cost object is an item for which costs are compiled, such as a product, person, sales region, or customer. There are very few direct costs, since most costs are associated with overhead - that is, they cannot be precisely matched to a cost object. Examples of direct costs are as follows:
Consumable supplies. Consumable supplies are items not directly itemized as being consumed in relation to a particular product, but which are consumed during the production process. Oil and other lubricants can be considered consumable supplies. This tends to be quite a minor direct cost.
Direct materials. Direct materials are those materials directly incorporated into a product. For example, the aluminum and steel used to produce a car are classified as direct materials. This tends to be the largest of the direct costs, and may be the single largest expense incurred by a manufacturing business.
Sales commissions. Sales commissions are only incurred if a product or service is sold, and so is definitely considered a direct cost - despite being classified as a selling expense, rather than part of the cost of goods sold. This means that it is not included in the calculation of firm’s gross margin, as are all other direct costs.
Freight costs. Freight costs are incurred to bring direct materials into a manufacturing facility, and to ship goods to customers. Since these costs vary with the production and sales level, they can be considered direct costs. The amount of this cost may be quite low, if customers pay for shipping.
Direct services labor. The cost of the labor incurred to directly support a customer can be considered a direct cost. For example, this could be the cost of a field service technician, or a programmer working on a custom software development project that will be billed to a customer, or the cost of an attorney working on behalf of a client.
How to Identify Direct Costs
The best way to determine whether a cost is a direct cost is to compare changes in the cost to changes in the associated cost object. If there is a change in the cost object, there should be a matching change in the cost. For example, if the cost object is a product, then direct materials, consumable supplies, freight in, freight out, and sales commission costs can all be expected to change in association with changes in the number of products sold. These are not just examples of direct costs linked to products - they are all of the direct costs. Every other production cost is considered to be overhead, including direct labor, because they do not change with unit volume.
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Other Types of Direct Costs
Examples of direct costs expand in number as we move beyond products. For example, the direct costs of a customer are not only the items just noted, but possibly also some customer service and field support staff. This is the case only if these positions were to be eliminated as a result of a customer being eliminated.
What about the sales region cost object? In this case, direct costs are not only the ones noted for products, but also the distribution and sales network within that region, which may be substantial. In this case, direct costs can comprise a significant proportion of total costs.
And finally, what are examples of the direct costs associated with a person? This is at least their compensation and benefits. It likely does not include their office space, since that cost must still be incurred even in their absence. Also, their cell phone cost may not be a direct cost, if the phone will be handed off to someone else.
In short, the bulk of all costs incurred are generally not to be considered direct costs. The examples of direct costs will vary, depending on which cost object is being considered.
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