What
is Direct Cost?
A cost which can be
directly associated to an activity is known as direct cost. Direct cost concept
play important role in decision making. Examples of direct cost include the
direct labor cost and direct material cost.
What
are characteristics of direct cost?
Characteristics of direct
cost include the following;
1. Directly traceable to activity
Direct costs are directly traceable
to an activity. For example direct material cost can be traced to product
without any difficulty. Similarly directly involved labor in manufacturing can
be easily traced to product cost.
2. Directly allocated to product
Direct cost is directly
allocated to product without using any assumption or method of appropriation. While
in case of indirect cost management distribute the cost to an activity using
some reasonable bases.
3. Separately classified in accounts
Direct cost is separately
classified in the profit and loss account. This classification referred as
prime cost, this classification provides useful information for decision
making.
