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Direct cost is a cost that is involved specifically and directly in the production of a good or service (No author, 2013). For example, in the production of a hamburger direct costs would be the ingredients. If the person cooking the burger only cooks burgers, and does one burger per hour (just an example), then the direct labor cost of that burger would be one hour's worth of wages. Sometimes, however, it can be more difficult to determine the direct cost of producing a good or service, and that is where the risk of errors comes into play.
For example all costs can be taken as direct costs. This is a common error. There is a logical slippery slope involved in attributing costs. So for example, our burger flipper might flip an average of 40 burgers in an hour. The company might be tempted to average that wage over the number of burgers, coming to a conclusion that the direct labor cost of a burger is 20 cents. There are two pitfalls in this example. The first is taking the average -- in another hour there might only be 30 burgers flipped, so the average...
It can be difficult to determine an accurate figure for direct labor costs under these circumstances. For some tasks it is much easier to determine the direct labor cost. When you pay a plumber to fix your sink and he charges you $100 an hour for labor, that is a direct labor cost that is easy to measure. Many companies do like the burger joint and attempt to average out costs to determine a direct cost, but their figures are subject to fluctuations in production.
The second pitfall in the burger example is that the burger flipper might also perform other tasks. If this labor also is used to make fries and onion rings, then the direct labor cost per burger is even harder to calculate. The company would need to know how much time the person dedicated to each task. Short of putting the person on a stopwatch while they move around the kitchen, this is impossible. While there is direct labor involved in making burgers and fries, it can be difficult to know precisely how much time is dedicated to each…
Works Cited:
No author (2013). Direct costs. Iinvestopedia. Retrieved March 2, 2013 from http://www.investopedia.com/terms/d/directcost.asp#axzz2MSmrwEGN
McIntosh, K. (2013). Advantages and disadvantages of absorption costing. eHow. Retrieved March 10, 2013 from http://www.ehow.com/info_8180267_advantages-disadvantages-absorption-costing.html
Peavler, R. (2013). Direct and indirect costs and their effect on pricing your product. About.com. Retrieved March 10, 2013 from http://bizfinance.about.com/od/pricingyourproduct/a/Direct-And-Indirect-Costs-And-Their-Effect-On-Pricing-Your-Product.htm
Direct costs are those that can be "attributed to the production of specific goods or services" (Investopedia, 2013). They can be labor, materials or other expenses. In contrast, indirect costs are those that cannot be directly attributed -- at least not easily -- to a specific product or service. For the most part, identifying direct costs is a straightforward, but occasionally there are pitfalls that can emerge. One pitfall when analyzing
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