Definition: Direct cost, or otherwise called as prime cost or traceable cost. It is the cost which can be directly allocated to the specific cost unit, cost centre or cost object, i.e. product, facility or project. On the basis of traceability, costs are classified into two types, wherein the first is direct cost, the other being indirect cost.
- Cost of Plastic for the creation of plastic items.
- Salary of the production manager.
- Cost of ceramic for the creation of crockeries.
- Wages of factory workers.
Components of Direct Cost
Direct Cost is a combination of three major costs, i.e. Direct Material Cost, Direct Labor Cost and Direct Expenses, discussed as under:
Direct Material Cost
Basically, materials imply the raw materials and supplies, which are used as an input to transform the same into finished goods ready for sale, and the cost incurred in acquiring the material is termed as Direct Material Cost.
It includes all kinds of raw material, primary packing materials, parts or components purchased, materials particularly bought for a specific job, process or order, etc.
The material cost, which is outrightly identifiable, conveniently measurable and chargeable to the final product, for which the materials are used, is termed as direct materials. It is an important part of the total cost, as it is completely related to the production process. So, it requires special attention, care and treatment as well.
Direct Labour Cost
Any form of consideration paid or payable to the factory workers/labours, employees, foreman, supervisor, production manager and so forth, who are directly engaged in the process of production is called as direct employee cost or direct labour cost.
Here the word ‘consideration’ includes wages and salary, overtime payment, allowances and incentives, free food, perquisites, leave encashment, employer’s contribution to provident fund, workmen compensation fund etc.
Direct Labour Cost can be outrightly identified, and attributable to the specific cost unit, cost centre, cost object, etc. It has a positive relationship with the volume of production, i.e. the higher the volume, the higher will be direct employee cost and vice versa.
All the costs incurred during the production of goods or supply of services, which are not included under the heads direct material cost and direct labour cost are covered under this category. These expenses are also known as chargeable expenses as they are straightforwardly identifiable and associated with the particular cost unit or cost object in an economically feasible manner. It covers:
- Cost of product/service specific software
- Value of patents
- Rental charges for renting plant or machinery
- Cost of special patterns, designs or tools.
- Royalty paid/to be paid for the production of product or supply of services.
- Cost of Architects, surveyors etc.
- Travelling expenses to the site.
When a lump-sum amount is received against direct expenses, the cost is amortised over the anticipated production volume or benefit received.