1. The Direct Costs
Direct costs are all costs that are directly related to the product or services your business makes or sells. There are two types of direct costs:
Direct Material Costs.
These are all the money your business spends on the parts and material that become part of, or are directly related to, the products or services you make or sell. For a retailer or wholesaler, the costs of buying goods to resell are the direct material costs. To be counted as direct material costs, the amount of material must be easy to calculate, and the cost of material must be big enough to add a considerable amount to the total direct costs.
Direct Labour Costs.
Direct labour costs are all the money your business spends on wages, salaries and benefits for the people who are directly involved in the production of your products or services. The time spent on making the product must be easy to calculate and the cost of the direct labour must be big enough to add a considerable amount to the total direct labour costs.
Retailers and wholesalers do not have employees working directly in making products, so they do not have direct labour costs. For retailers and wholesalers, all salaries and wages are indirect costs.