Direct costs are expenditures that can be completely attributed to the manufacture of a product, be it goods or services. They include the cost of materials, labour, and processes (such as freight).
Calculating direct costs first requires identifying and isolating elements in the organization that are directly responsible for the production of an end-product. These can be divided into two major categories: direct material costs and direct labour costs. Direct material costs are expenditures made for any materials that are directly involved in the manufacture of an end product. For example, flour would be a direct material cost for a bakery as it is an essential ingredient to create baked goods. Similarly, the cost of paying employees to work on the production of a particular good or service would be the direct labour costs. In the bakery example, the salaries of the bakers would be the direct labour cost. By adding the material and labour costs for producing a good or service, we get the direct cost.