Direct Costs

mge

If a company only makes one product line (eg. a particular type of chair) then all the costs incurred by the company can be attributed to this product line. Therefore, are all the costs incurred by the company 'direct costs'?

Any help would be much appreciated.

jilt

No not all costs incurred by the company are direct cost.

Materials and labour to make the chair are direct costs.


From wikiAnswers:
Direct Costs: These are those costs which are necessary for the production of the goods and without which it is not possible to make the product. Like Direct Materials, Direct Labour.
Example:
In the process of making shoe leather is called the direct material which is necessary to make shoe and the cost of this leather is direct cost to the product of shoe.

mge

Many thanks for your reply jilt.

I can see that under the definition you quoted all the costs incurred would possibly not be classified as direct costs.

However, I've never seen direct cost defined like this before. Normally the definition seems to go something along the lines of (quoted from Investopedia):

"What Does Direct Cost Mean?
A cost that can be directly traced to producing specific goods or services.

Investopedia Says
Investopedia explains Direct Cost
For example, the cost of meat in a hamburger can be attributed directly to the cost of manufacturing that product. Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product, and so are not considered direct costs."

Under this definition all costs would be direct costs as they can all be assigned to a specific product ie. the only product that the company make.

SandyHood

Just look at a chair

The costs that were incurred producing it were NOT all direct to that (single) chair

Rent is incurred
Health and Safety traing costs are incurred

Can you tell me that either of those costs "belong" to the chair?

They were essential costs but they are indirect.
Direct costs belong to products
The wood that makes up the frame
The time someone took to fot the seat etc
possibly a patent fee

But not the cleaning material needed to clean the band saw machine
- that cost is an indirect cleaning material

I hope a more physical approach works better than looking for definitions.
If you can say a cost "belongs" to a product - that cost is direct.
If not it is indirect.

mge

Many thanks for that explanation SandyHood. It's very useful indeed, and is much appreciated.

Thank-you jilt for your explanation. Your definition is also very helpful.