Direct Expenses

Direct expense is cost which is directly associated in production of a product other than raw materials and labor. As the name suggests, these type of cost are paid or incurred to directly produce the final good or service. In other words, direct expenses are directly attributable to the object.

Example

Next Generation company ltd produces toys for children. Apart from the raw materials and laborers needed to produce the toys, the company also uses a certain chemical to soften the raw materials so as to make the toys user friendly to the end users who are small kids.

Each piece of a toy require 0.5ml of the chemical. If the cost per 0.1ml of the chemical is $0.3 per 0.1ml of the chemical. Ten the total direct cost of the chemical is

=0.5ml*$0.3=$1.5

NB: Material cost, labor cost and direct expenses is commonly referred to as direct cost or prime cost. And all prime costs vary with output. In other words, as production level changes, the prime costs also change directly. Such that if production increases, prime cost also increases and the vice versa is true although the variation may not be proportional.