What is a direct cost?

A direct cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department. Direct and indirect costs are the two major types of expenses or costs that companies can incur.

Why is direct costing important?

Direct costing is very useful for controlling variable costs, because you can create a variance analysis report that compares the actual variable cost to what the variable cost per unit should have been. Fixed costs are not included in this analysis, since they are associated with the period in which they are incurred, and so are not direct costs.

Is Labour a direct cost?

In certain cases, labour is a direct cost. To be more specific, it is considered a direct cost when it can be tied directly to the cost object, such as a product, service, customer, project or facility. Otherwise, it is considered an indirect cost. As a direct cost: an employee on an assembly line. As an indirect cost: administrative staff.

Is direct costing a taxable expense?

Direct costing is prohibited for the reporting of inventory costs under both generally accepted accounting principles and international financial reporting standards. This means that you cannot report the cost of inventory as though it only includes direct costs; you must also include a proper allocation of indirect costs.