Glossary
Direct costs
Costs that can be traced directly to making a product.
What it means
Costs directly attributable to production, such as direct materials and direct labour.
Example
The wood used to make a table is a direct cost of that table.
Why it matters
Direct costs make up prime cost; separating them from overheads is central to a manufacturing account.
In practice
Direct costs are the costs you gather first in a manufacturing account. At the top, you total three things. These are direct materials consumed, direct labour (the wages of the people physically making the goods) and any direct expenses. A direct expense is, for example, a royalty paid on each unit produced. This is the prime cost. Factory overheads are then added, and the result is the cost of production transferred to the trading account.
Imagine a small workshop making one type of stool. The timber for each stool costs RM8 and the joiner is paid RM5 per stool completed. Both trace directly to the stool, so prime cost per unit is RM13. The workshop rent of RM600 a month cannot be pinned to any single stool. It is an indirect cost (a factory overhead).
Students often confuse direct and indirect costs. Direct costs attach to identifiable units. Indirect costs are shared across output and must be apportioned. A quick test is to ask whether the cost would disappear if that one unit were not made. If yes, it is direct.
If sorting costs into direct and indirect is slowing you down, one of our teachers can practise it with you using past-paper lists. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.4 Manufacturing accounts (page 17).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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