What it is:
A direct cost is any cost related to the production method of a good or service. It is the opposite of an indirect cost.
How it works (Example):
Direct costs are variable costs associated with the inputs and labor required to produce a good or service. For instance, two direct costs associated with producing a copper pipe are the cost of the raw copper and the wages paid to the worker molding the copper into the shape of a pipe. Direct costs should not be confused with indirect costs, which are fixed costs unrelated to inputs and labor.
Why it Matters:
The variable nature of direct costs causes them to rise and fall proportional to increases and decreases in output.