Direct Costs
Definition:
Direct costs are expenses that can be directly attributed to the production of a specific good or service. These costs are typically easy to identify and quantify, and they vary directly with the level of output or activity.
Example:
Acme Manufacturing is calculating the direct costs associated with producing a new line of headphones. Direct costs include the cost of raw materials like electronic components, as well as the direct labor costs of assembly line workers who put the headphones together. These costs can be easily traced to each individual headphone produced and will increase or decrease based on the number of headphones manufactured.
Why are Direct Costs Important to Procurement teams?:
Understanding and accurately tracking direct costs is important for procurement teams, as these costs have a significant impact on the overall profitability of a product or service. By managing direct costs effectively, procurement teams can help to optimize production processes, negotiate better prices with suppliers, and make informed decisions about product pricing and profitability. Accurate direct cost data also supports effective budgeting, cost control, and financial reporting.