Direct costs are costs related to a specific cost object. A cost object is an item for which costs are compiled, such as a product, person, sales region, or customer. Examples of direct costs are consumable supplies, direct materials, sales commissions, and freight. There are very few direct costs, since most costs are associated with overhead - that is, they cannot be precisely matched to a cost object. The best way to determine whether a cost is a direct cost is to compare changes in the cost to changes in the associated cost object. If there is a change in the cost object, there should be a matching change in the cost. For example, if the cost object is a product, the following costs can all be expected to change in association with changes in the number of products sold:
- Direct materials
- Consumable supplies
- Freight in and out
- Sales commissions
These are not just examples of direct costs linked to products - they are all of the direct costs. Every other production cost is considered to be overhead, including direct labor, because they do no change with unit volume.
Examples of direct costs expand in number as we move beyond products. For example, the direct costs of a customer are not only the items just noted, but possibly also some customer service and field support staff. This is the case only if these positions were to be eliminated as a result of a customer being eliminated.
What about the sales region cost object? In this case, direct costs are not only the ones noted for products, but also the distribution and sales network within that region, which may be substantial. In this case, direct costs can comprise a significant proportion of total costs.
And finally, what are examples of the direct costs associated with a person? This is at least their compensation and benefits. It likely does not include their office space, since that cost must still be incurred even in their absence. Also, their cell phone cost may not be a direct cost, if the phone will be handed off to someone else.
In short, the bulk of all costs incurred are generally not to be considered direct costs. The examples of direct costs will vary, depending on which cost object is being considered.