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Direct Cost

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.

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