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Direct Cost

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Direct cost is that which can be measured and assigned directly and unequivocally to a specific product. It's a category of cost classified according to its relationship with production.

These are the costs that are clearly attributed to a product to know its unit cost and for which it isn't necessary to establish any allocation criteria between different products because its individual economic distribution is obvious.

Types of direct cost

The most common types of direct costs are as follows:

- Raw material: they are the materials that are part of a product. In the manufacture of a door would be wood, hinges or screws. To make a door it's easy and intuitive to know how much raw materials you have used and the cost price of them.
- Direct labor: personnel directly related to the manufacture of the product for 100% of their time worked. Following the previous example, it would correspond to the salary of the worker who is putting the hinges or painting the wood.
- Others: containers, transport by unit, packaging, etc.

We must consider that the costs can be direct or indirect depending on the sector in which the company operates, and even depending on the organization that each company has. It may be that a cost is direct for one company and yet is an indirect cost for another company.

For example, if a company manufactures a single product, the cost of renting the factory would be a direct cost since it would only have to be distributed among the units produced. But a company that manufactures different products should classify that same cost as an indirect cost, since it would have to apply an imputation criterion for each product.

Example of direct cost

Imagine a company dedicated to the manufacture of leather shoes and the manufacture of sports shirts. Determine if the costs indicated below are direct costs:

- Leather: Yes Leather is a raw material used only for shoes and it's possible to quantify how much leather exactly each shoe needs.
- Fabric: Yes The fabric is a raw material used only for t-shirts, and it's possible to quantify how much fabric exactly each shirt needs.
- Cords: Yes. The laces are raw material and it's known how many laces each shoe wears.
- Amortization of machinery: No. In this case we're manufacturing two products and it isn't easy to quantify what part of the amortization we can allocate to each product. It could be done by machine hours used or by quantities produced, for example.
- Factory rental: No. Same case as the amortization of the machinery.
- Salary of sales personnel: No. It isn't personnel directly related to the manufacturing process.
- Salary of the person in charge of adding the cords: Yes. It's personal directly related to the manufacture of shoes and, therefore, we can distribute your salary among the number of shoes manufactured.

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