Direct costs are generally seen to be variable costs and they are called direct costs because they are directly associated with manufacturing. A good manufacturing example to consider when discussing direct costs is that of a furniture manufacturer. Let’s imagine we are making tables and chairs: wooden furniture but with cloth upholstery and so on. In turn, the direct costs can include:
direct materials: plywood, wooden battens, fabric for the seat and the back, nails, screws, glue …
direct labour: sawyers, drillers, assemblers, painters, polishers, upholsterers
direct expense: direct expenses can include the costs of special designs for one batch, or run, of a particular set of tables and/or chairs, the cost of buying or hiring special machinery to make a limited edition of a set of chairs …
Total direct costs are collectively known as Prime Costs and we can see that Product Costs are the sum of Prime costs and Overheads.