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What are direct costs?

Author:
Harold Averkamp, CPA, MBA

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.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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