Definition of Direct Costs
Direct costs are directly traceable to a cost object such as a product or a department. In other words, direct costs do not have to be allocated to a product, department, or other cost object. (A cost that must be allocated to a product, department, or other cost object is an indirect cost.)
Examples of Direct Costs
Assume that a company produces artisan furniture. The following are direct product costs and they are direct production department costs:
- The cost of the wood
- The cost of the craftsperson working on the furniture
The other costs of producing the furniture are indirect product costs, since they must be allocated to the furniture based on labor hours, machine hours, or some other activities. However, the indirect product costs could be direct production department costs.