A cost that is easily attributable to a cost center is known as Direct Cost. When all the direct costs are taken together they are known as prime costs. Example: Direct Material, Direct Labor, Direct Expenses.
The cost that can be directly attributable to/identified with/ associated with the specific cost center or cost object like a product, function, activity, project and so on is known as Direct Cost. Based on elements, the direct costs are classified into the following parts:
- Direct Material: The cost of material that can be allocable to production.
Example: Raw material consumed during production of the unit.
- Direct Labor: Wages to the laborers that can be identified with a cost object.
Example: The term wages include bonus, gratuity, provident fund, perquisites, incentives, etc.
- Direct Expenses: It includes all the other expenses that are directly linked to the production of a product.
Example: Job processing charges, hire charges for tools and equipment, subcontracting expenses.
When all these three costs are taken together, they are known as Prime Cost.