Direct costs are costs that are directly attributable to the production or sale of a product, such as raw materials, labor, and manufacturing overhead.

Examples of direct costs:

• Raw materials, such as oil, coal, and water
• Labor costs
• Manufacturing overhead, such as factory rent, utilities, and depreciation

Formula for calculating direct costs:

Direct costs = Costs directly attributable to the production or sale of a product

Direct costs are used to:

• Calculate the cost of goods sold
• Calculate the cost of finished goods
• Estimate the cost of a product