A measure of cost that reflects the total direct costs of a production process, including raw materials and labor (direct labor costs). It represents the costs directly incurred to manufacture a product or provide a service. Direct costs are the sum of the total cost of goods sold (COGS) and the total “direct” labor costs and other direct expenses.

Calculation of direct costs helps determines an entity’s contribution margin for a product/ service, and it reflects the potential of a product to cover fixed costs and expenses, as well as to produce a margin (profitability margin). Hence, flat costs play a significant role in cost accounting and constitute a crucial step towards determination of prices, and an entity’s ability to plan its sales and profits, and make relevant decisions (on multiple fronts including productions and sales).

Direct costs do not include indirect costs, such as utilities, administration (general and admin), delivery costs and so on.

It is also known as a prime cost or a flat cost.