Direct (prime) costs

Last updated: 26.03.2016

Direct costs are costs directly and clearly identifiable with cost object (usually product or service). That means the costs DIRECTLY associated with the production process of specific product. Together with indirect costs (overheads) they form total costs of the entity.  They are sometimes called prime costs.

Examples of such costs: cost of raw materials, parts and components used to manufacture and complete the product, wages of workers

Direct costs are especially not: salaries of non-production staff, administration, selling and distribution overheads

 

DIRECT COSTS INCLUDE

 

ACCOUNTING FOR DIRECT COSTS

Direct costs used during inventory production (or possibly during the production of any other asset) are mostly NOT (often together with allocated production indirect costs) recognized immediately as an expense but form part the valuation of the inventory (i.e. part of balance sheet). They become part of cost of goods sold (i.e. statement of profit and loss) at the moment when the inventory is sold. 

This is also true for inventory valuation under IAS 2 – Inventories.

 

Because the production differs from industry to industry, or even from business to business it is difficult to prepare a detailed list of direct costs. There are only a several general lists and definitions (see e.g. above) which can help to comprehend the meaning. Therefore, the detailed classification is up to the entity.

 

AND WHAT IS A DIFFERENCE BETWEEN DIRECT AND VARIABLE COSTS?

Most of the direct costs are variable. But as the classification between direct x indirect and fixed x variable is based on different basis, it is therefore not a condition.

 

Direct costs can be either external or internal.

 

Examples of direct/indirect costs split into variable/fixed and production/non-production:

 



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