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Direct Costs (Variable Costs)

 
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Direct cost can be defined as the cost that directly supports a given sale. In the P&L, Direct costs are debited as costs from the revenue to get to the Gross Margin. In production companies, direct costs are primarily the applied materials and direct labor cost. Also stock count regulations performed periodically are normally posted as direct costs. Other direct costs such as the packing, shipment and other direct costs supporting the sales are also referred to as direct costs.

Therefore, Directs costs are also oftentimes referred to as Cost of Goods Sold (COGS) indicating that these costs have a direct relation to the sales of the period.

Of course, the aim of each company is to reduce its costs, so that the Gross Margin in % can be as high as possible, and so that the company generates enough cash after its use of direct resources to cover its indirect costs and depreciations of e.g. its production machinery. Everything kept stable, low direct cost and high Gross Margins will yield high profits.

 
 
 
 
 
Date Created: 2014-08-05
Posted by: Admin
 
 
Direct Costs (Variable Costs)
 

Related resources:

Return on Investment (ROI)
Return on Assets (ROA)
Return on Equity (ROE)
Return on Capital Employed (ROCE)
Contribution Margin and Contribution Margin Ratio
Reference(s)
 
Keywords:

MBA, MSC, COLLEGE, BA, Direct Cost, fixed cost, variable cst, direct, indirect, cogs, gross margin

 






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