Direct Cost

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Definition of 'Direct Cost'

A direct cost is a cost that can be easily traced to a specific product or service. Direct costs are incurred in the production of goods or services and are directly related to the production process. Examples of direct costs include labor, materials, and overhead.

Direct costs are important for businesses to track because they can help to determine the profitability of a product or service. By knowing the direct costs associated with a product or service, a business can determine how much it needs to charge in order to make a profit.

Direct costs can also be used to compare the costs of producing different products or services. This information can be helpful for businesses that are considering expanding their product line or entering new markets.

In addition to direct costs, businesses also incur indirect costs. Indirect costs are costs that cannot be easily traced to a specific product or service. Examples of indirect costs include rent, utilities, and insurance.

Indirect costs are also important for businesses to track, but they are not as easy to calculate as direct costs. Indirect costs are often allocated to products or services based on a predetermined allocation method.

By tracking both direct and indirect costs, businesses can get a more complete picture of their overall costs. This information can be used to make informed decisions about pricing, product development, and expansion.

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