direct cost

noun

variants: or less commonly direct charge

Definition of direct cost

: a cost that may be computed and identified directly with a product, function, or activity and that usually involves expenditures for raw materials and direct labor and sometimes specific and identifiable items of overhead —contrasted with indirect cost

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direct cost

noun

Financial Definition of direct cost

What It Is

A direct cost is any cost related to the production method of a good or service. It is the opposite of an indirect cost.

How It Works

Direct costs are variable costs associated with the inputs and labor required to produce a good or service. For instance, two direct costs associated with producing a copper pipe are the cost of the raw copper and the wages paid to the worker molding the copper into the shape of a pipe. Direct costs should not be confused with indirect costs, which are fixed costs unrelated to inputs and labor.

Why It Matters

The variable nature of direct costs causes them to rise and fall proportional to increases and decreases in output.

Source: Investing Answers

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