In a company, direct costs are those costs that can be specifically assigned to a specific product or service. According to Abbreviationfinder, direct cost is short for DC.

Definition

The special feature of the individual costs is the very specific attributability of the costs to a certain cost unit. A distinction is made between various individual costs:

• Material direct costs (MEK)
• Direct production costs (FEK)
• Special direct costs in sales
• Special direct costs of production

The counterpart to the direct costs are the overhead costs, which are costs that cannot be directly allocated to the company’s products and services, such as the rent paid for an office.

Determination of individual costs

There are two common methods for calculating direct costs : the marginal cost method and process costing .

The marginal cost method focuses on how much, for example, the exact cost of manufacturing a certain product. In contrast, process costing takes into account which resources were all used for production. Specifically, this means that parts of the fixed costs are added on a pro rata basis.

The difference between the two methods can be easily explained with an example. In the marginal cost method, factors such as the cost of installed screws are used with regard to production costs. With process cost accounting, one would also consider that the screws are installed in a workshop and the rent for the workshop would be allocated proportionally.

Both calculations are of great help in determining later sales prices . On the one hand, they show the costs incurred and, on the other hand, enable the determination of potential sales prices with surcharge rates and other methods. Thus, the determination of the individual costs is not only important for checking the cost structure, but also for the sales price.

Differentiation: direct costs and overhead costs

The difference between direct costs and overhead costs is easy to explain:

The individual costs are clearly attributable to a specific cost unit . So you know exactly what causes the individual costs and can allocate them directly to the respective cost unit.

In the case of overhead costs, on the other hand, it is not that easy to allocate. These are costs that are incurred – and are often unavoidable in order to run the company – but they are not directly attributable to a cost unit . The typical example is office rent, which can hardly be avoided, but cannot, for example, be fully or clearly assigned to a specific product sold.

The individual costs can be displayed very transparently. The advantage is that clear calculations (e.g. full cost accounting ) are made possible. In addition, you can create cost awareness among employees in the simplest way, as you can clearly say that these costs are directly attributable. In the case of individual costs, there is therefore very clear transparency about the causation and allocation of these.

Types of unit costs

The four types of individual costs were already briefly mentioned at the beginning, now we will go into a little more detail about them.

Cost unit direct costs and cost center direct costs

Basically, a distinction must be made between the cost unit direct costs and the cost center direct costs .

The cost center direct costs are those costs that can be assigned at the cost center level, for example through corresponding receipts , if a cost center consumes auxiliary materials. Another simple example is the costs for the head of the respective cost center.

There are four different groups for cost unit direct costs :

Direct material costs

These are material costs that can be assigned directly to the cost object. If your company manufactures laptops and therefore purchases screens, a screen can be clearly assigned to the cost unit “laptop” as a material component.

Direct production costs

Direct production costs arise in the manufacture of the product and can be assigned directly. This means that it is a question of manufacturing costs that can be directly attributed to the finished product. The allocation of the costs takes place here exactly at the product level, which is the difference to the special direct costs, which we will now explain.

Special direct costs of production

In addition to the clearly attributable costs, there are also special costs in production that can also be clearly attributed to an order, for example, but not exactly to a product. An example are the wages of employees in production or a special tool that is required for an order but cannot be clearly allocated to individual products in terms of costs.

Special direct costs of sales

The costs of distribution can typically not be fully allocated to individual products. Examples would be shipping insurance or commissions for employees in sales.

Conclusion

In conclusion, it can be said that the individual costs are a very important calculation variable for all entrepreneurs. The subject is not the easiest, but only those who have their costs under control can calculate ideally and offer their own products at the best price.

The individual costs help to enable a coherent and really detailed calculation and should therefore not only be included in subsequent considerations in controlling , but above all in creative and planning processes (e.g. when calculating potential sales prices in the course of new product developments) .