Short definition: A direct cost is an expense that can be directly attributed to a specific cost object, such as a product, service, or project.
Explanation: These costs are easily traceable and identifiable with the production or delivery of a particular output. Direct costs are essential for calculating the cost of goods sold (COGS) and determining the profitability of specific products or services.
Example: In manufacturing, direct costs would include the cost of raw materials used to make a product and the wages paid to the workers directly involved in its production. In a service business, the salary of a consultant working on a specific client project would be a direct cost.
Additional information (optional): Direct costs are contrasted with indirect costs, which are expenses that cannot be directly traced to a single cost object and are often shared across multiple products or services. Understanding the distinction between direct and indirect costs is crucial for cost accounting and management.