Direct costs are costs which are directly accountable to a
cost object
A cost object is a term used primarily in cost accounting to describe something to which costs are assigned. Common examples of cost objects are: product lines, geographic territories, customers, departments or anything else for which management ...
(such as a particular project, facility, function or product). Direct cost is the nomenclature used in accounting. The equivalent nomenclature in economics is specific cost. By contrast, a
joint cost
A joint or articulation (or articular surface) is the connection made between bones, ossicles, or other hard structures in the body which link an animal's skeletal system into a functional whole.Saladin, Ken. Anatomy & Physiology. 7th ed. McGraw- ...
is a cost incurred in the production or delivery of multiple products or product lines. For instance, in civil aviation, substantial costs of a flight (pilots, fuel, wear and tear on the plane, landing and takeoff fees) are a
joint cost
A joint or articulation (or articular surface) is the connection made between bones, ossicles, or other hard structures in the body which link an animal's skeletal system into a functional whole.Saladin, Ken. Anatomy & Physiology. 7th ed. McGraw- ...
between carrying passengers and carrying freight, and underlie
economies of scope
Economies of scope are "efficiencies formed by variety, not volume" (the latter concept is "economies of scale"). In economics, "economies" is synonymous with cost savings and "scope" is synonymous with broadening production/services through div ...
across passenger and freight services. By contrast, some costs are specific to the services, for instance, meals and flight attendants are specific costs of carrying passengers.
Direct costs are directly attributable to the object. In construction, the costs of materials, labor, equipment, etc., and all directly involved efforts or expenses for the cost object are direct costs. In manufacturing or other non-construction industries, the portion of operating costs which is directly assignable to a specific product or process is a direct cost. Direct costs are those for activities or services that benefit specific projects, for example salaries for project staff and materials required for a particular project. Because these activities are easily traced to projects, their costs are usually charged to projects on an item-by-item basis.
The economics term for the same concept is specific cost.
Direct costs typically include:
*Direct materials used in manufacturing
*Direct labour
*Direct expenses, e.g. a
royalty payment
A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset o ...
to a
patent holder
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...
for a specific production process
[ CIPS (2016), ''Procurement and supply workflow'', published by Profex Publishing Ltd., p. 49]
References
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Accounting