Direct cost

Published Wednesday 30 September 2026

Table of contents

• What is a direct cost?
• Examples of direct costs
• Types of direct costs
• Direct costs vs indirect costs
• Direct costs vs overheads
• Direct costs, COGS and cost of sales
• Direct costs, fixed costs and variable costs
• How to calculate direct costs
• Why direct costs matter
• Track your direct costs with Xero
• FAQs on direct costs
• Related terms
• Learn more about direct costs

Key takeaways

• A direct cost is an expense you can trace to a specific product, service or job, such as materials and production labour.
• Indirect costs and overheads are the background costs of running your business, such as insurance, admin and marketing.
• For most small businesses, direct costs make up the cost of goods sold (COGS) or cost of sales, which you subtract from revenue to get gross profit.
• Knowing your direct costs helps you set prices, protect your margins and plan cash for busy periods.

What is a direct cost?

A direct cost is an expense you can trace to the goods or services your business sells. It’s the opposite of an indirect cost, which supports the whole business.

Picture a café. The coffee beans and milk in each latte are direct costs, while the café’s insurance is an indirect cost. The thing you’re costing, whether a single latte or a whole client job, is called the cost object.

Examples of direct costs

Direct costs look different in every industry, but they always tie back to what you sell. Common examples include:

• a retail shop’s stock bought for resale and the bags or boxes it’s sold in
• a manufacturer’s raw materials and the wages of staff on the production line
• a service business’s billable staff hours and the contractors hired for client work
• a restaurant’s ingredients and the kitchen team who prepare each dish
• a workshop or factory lease, plus its energy, when the space is used only for production

Businesses take different views on workshop and factory expenses, and on freight and warehousing. Settle on a definition that suits your business and apply it the same way every period.

Types of direct costs

Accountants usually sort direct costs into materials, labour and direct expenses. In practice, you’ll often split direct expenses further:

• direct materials, such as fabric, ingredients, components or stock for resale
• direct labour, meaning wages and employer Central Provident Fund (CPF) contributions for staff who make the product or deliver the service
• subcontractor fees for work done on a specific job or order
• other direct expenses, such as royalties or per-sale licence fees tied to each unit sold

Direct costs vs indirect costs

Indirect costs are the background expenses of running your business, such as utilities, insurance, general admin, marketing and sales. The easiest test is to ask whether the cost would disappear if you stopped making that product or delivering that service.

• Direct costs link to a specific product or job.
• Indirect costs support the business as a whole.
• Direct costs usually rise and fall with sales volume.
• Indirect costs tend to stay steadier from month to month.
• Direct costs sit in cost of sales on your profit and loss statement.
• Indirect costs sit under operating expenses.

Employees and facilities can be direct or indirect, depending on how your business uses them. You classify each cost as one or the other for a given cost object, then apply that choice consistently.

Direct costs vs overheads

Overheads are the indirect costs you pay to keep the doors open, such as office rent, accounting fees and software subscriptions. People often use “overheads” and “indirect costs” to mean the same thing.

The difference matters most when you set prices. Each sale needs to cover its own direct costs, contribute a share towards overheads and still leave you a profit.

Direct costs, COGS and cost of sales

For most small businesses, direct costs and cost of goods sold are the same figure. Product businesses tend to say COGS, while service businesses usually report cost of sales instead.

The terms can drift apart when you hold inventory. Under International Accounting Standard 2 (IAS 2), adopted in Singapore as SFRS(I) 1-2, the cost of inventories includes costs of purchase, costs of conversion such as direct labour, and other costs of getting stock to its present location and condition. Those costs only reach COGS when you sell the stock, so this month’s direct spending and this month’s COGS may differ.

Direct costs, fixed costs and variable costs

Direct and indirect describe what a cost relates to, while fixed and variable describe how it behaves as sales change. The two sets of labels overlap in useful ways.

Most direct costs are variable: sell twice as many cakes and you’ll buy twice as much flour. Some direct costs are fixed, such as the lease on a dedicated workshop or a salaried production manager. Indirect costs can be variable too, like electricity bills that climb in a busy month.

How to calculate direct costs

You calculate direct costs by adding up every cost you can trace to one cost object over a set period. The basic formula is direct materials plus direct labour plus direct expenses.

1. Choose the product or service you’re costing and the period you’re measuring.
2. Add up the direct materials used in that period.
3. Add the direct labour cost for the time staff spent making or delivering it.
4. Add any direct expenses, such as subcontractor fees or royalties.
5. Divide the total by the number of units sold to get the direct cost per unit.

Say you run a small bakery in Singapore and sell 200 cakes in a month. Ingredients cost S$6 per cake (S$1,200) and packaging costs S$1 per cake (S$200). Your baker’s wages for the hours spent on those cakes come to S$2,400, and a freelance decorator charges S$4 per cake (S$800).

Your total direct costs are S$1,200 + S$200 + S$2,400 + S$800 = S$4,600. That works out to S$4,600 ÷ 200 = S$23 per cake. If you sell each cake for S$40, your revenue is S$8,000 and your gross profit is S$3,400, a gross margin of 42.5%.

Why direct costs matter

Every sale creates a knock-on increase in costs, so your direct costs shape how much each sale really earns. Tracking them closely helps you:

• set prices that cover each unit’s costs and leave room for profit
• spot changes in your gross profit margin when supplier prices rise
• build stock and staffing costs into your cash flow forecast
• compare the profitability of different products or clients

A seasonal business needs cash on hand to buy materials before the busy period starts. If you’re planning a big sales push, check that you can afford the extra stock and labour needed to meet the demand.

Track your direct costs with Xero

When you know your direct costs, you can price with confidence and plan ahead for busy seasons. Xero helps you record costs as they happen and see your gross profit in real-time reports. You can also track job costs for each client or project.

Spend less time on spreadsheets and more time growing your business. Try Xero and get one month free.

FAQs on direct costs

Here are answers to common questions about direct costs for small businesses in Singapore.

Is labour always a direct cost?

Labour is a direct cost only when you can trace the time to specific products or client work. Admin, finance and management staff usually count as indirect costs.

Can a service business have direct costs?

Yes, a service business’s direct costs include billable staff time, contractors and any materials used on client work. Tracking these per client shows you which jobs are the most profitable.

Where do direct costs appear on a profit and loss statement?

Direct costs appear near the top, under cost of sales or COGS, where they’re subtracted from revenue to give gross profit. Overheads and other operating expenses come further down.

Are direct costs tax deductible in Singapore?

Business expenses incurred wholly and exclusively to produce your income are generally deductible, and most direct costs meet that test. Check the IRAS guidance on business expenses or ask your accountant about specific items.

Do direct costs include delivery fees?

Freight to bring stock into your business is usually part of its cost, so it counts as a direct cost. Delivery to customers is often treated as a selling expense, so choose a treatment and apply it consistently.

Related terms

• Indirect cost
• Fixed cost
• Variable cost
• Gross profit
• Expense
• Margin vs markup

Learn more about direct costs

• What are overheads
• How to increase profits
• Profitability ratios
• Business cost-saving ideas
• Financial statements