Direct costs are those expenses that are explicitly associated with the production of a product or the delivery of a service. These costs include resources or components that can be directly traced to the cost object, such as raw materials, direct labor, and manufacturing supplies. For instance, in a furniture-making company, the wood used to construct a chair and the wages of workers assembling the furniture fall into the category of direct costs. An understanding of direct costs is essential for accurately calculating the cost of goods sold (COGS), and it plays a pivotal role in determining product pricing and profit margin analysis.

An important distinction in cost classification, direct costs differ from indirect costs, which are not easily attributable to a single product or service, such as administrative salaries or utility bills. Companies greatly benefit from identifying and monitoring their direct costs to implement effective cost control measures and establish competitive pricing strategies that ensure profitability while remaining competitive in the marketplace. Related financial tools, such as Contribution Margin analysis and tracking Cost of Goods Sold, often rely on understanding direct costs to enhance financial decision-making.