What is Direct Cost System?

Direct cost system is a method of cost calculation accounting for expenditure directly related to the production cost. It could be materials or labor that go directly toward the manufacturing of a particular product. Semiconductors required in the manufacture of vehicles are a good example, where the cost is not always fixed. Global supply chain volatility has proven to cause a massive fluctuation in the cost of semiconductors, which in turn have increased the manufacturing cost for most automakers.

The direct cost system also includes resources and materials, processes, individuals (such as employee salaries), or direct expenses (such as royalties to a patent holder). A direct cost requires a specific cost object in the organization that it can be attributed to, such as a particular project or product.