What are Direct Selling Costs?
Direct selling costs, more commonly known as direct cost of sales or cost of goods sold (COGS), is the amount of cash that a company invests in the production of a good or service it sells.
Direct selling costs don’t include rent, facility costs, or administrative expenses. On the other hand, they do include the following:
- Direct labor costs
- Utilities costs directly related to production
- Shipping costs
- Processing costs
- Commissions paid to sales personnel
- Advertising costs
Calculating Direct Selling Costs
Direct selling costs aren’t particularly hard to calculate. Every company’s income statement includes a COGS account, where sold inventory is listed. Inventory listed at the beginning of the year is what remains with the company from the previous year. Throughout the year, as new inventory is produced and services rendered, the costs are added.
When the billing year ends, any unsold inventory is deducted from the inventory at the beginning of the year, plus the additional goods produced and services rendered. Once subtracted, the company gets its direct selling costs for the year.
Labor and direct materials used to produce any product are direct selling costs. For example, a woman is hired to work on the production of wooden craft boxes. She receives an hourly wage. The amount that she is paid for every hour she works is a direct selling cost. The wood and metal hinges that make up the box are also direct selling costs.
Direct costs are almost always variable because they are going to increase when more goods are produced. The primary exception to the rule is labor. Most employee wages are fixed and will not change over the course of the year. However, if employees work overtime to meet production needs, then the direct labor costs increase.
Direct Costs vs. Indirect Costs
From an accounting and budgeting standpoint, having accurately classified expenses is crucial. Direct and indirect costs, on the surface, seem pretty self-explanatory. However, there is a certain amount of nuance between the two.
Indirect costs are usually necessary for the production and distribution of a good or service, but they can’t be linked back directly to said good or service. They are a sort of prerequisite for a good or service to make it to production. Direct costs, on the other hand, are specific to a particular good and/or service that the company offers.
Having a firm understanding of the difference between direct and indirect costs is important because it shapes how a company attaches prices to the goods and services it offers. Knowing the actual costs of production enables the company to efficiently and competitively price their products.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: