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Aavenir Atlas early access is open Contractflow on the ServiceNow Store since 2019 Runs on ServiceNow, or standalone ProcureTech100 2025/26 Pioneering Digital Solution ISO/IEC 27001:2022 certified, SOC 2 Type 2 compliant

Glossary

How do you calculate direct cost?

Direct cost is the cost traced wholly to making a specific product or service. The basic formula adds direct materials, direct labor and other direct expenses.

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The formula

Direct cost = direct materials + direct labor + other direct expenses.

  • Direct materials. Raw materials and components that go into the product.
  • Direct labor. Wages for the people who make the product or deliver the service.
  • Other direct expenses. Costs used only for that output, such as a subcontractor or a license bought for one project.

Add the amounts for a period, then divide by units produced to get direct cost per unit.

What is not a direct cost

Manufacturing overhead, such as factory equipment, facility upkeep and staff training, is an indirect cost. It supports production but cannot be cleanly assigned to one product, and it is rarely clear what share of it a single unit uses. Keeping the two apart gives accurate product costing, pricing and margin analysis.

How Aavenir handles it

Direct material and subcontract costs are largely set by supplier contracts. Invoiceflow checks each invoice against the contracted rates, so the costs that feed your calculation are the ones you agreed, and Contractflow keeps those rates on record.

Worked example

A workshop makes a batch of tables. Wood and hardware cost a set amount, and builders' wages for the batch add another. Add the two, plus any subcontracted finishing, then divide by the number of tables for direct cost per table.

Keep reading

Direct spend Direct spend is money spent on the materials, components and services that go straight into the products a business sells, and it forms part of cost of goods sold.Read more Acquisition cost Acquisition cost is the total cost a company records for an asset such as equipment, after discounts, incentives, closing costs and other spending, before sales tax.Read more Direct procurement Direct procurement is sourcing and buying the raw materials, goods and services that go straight into the products or services a company produces and sells.Read more

Frequently asked questions (FAQ)

Common questions

What is an example of a direct cost?

For a furniture maker, the wood, hardware and wages of the workers who build each chair are direct costs. Factory rent and machine maintenance are indirect. Read about direct spend.

Is direct labor always a direct cost?

Only when the labor can be traced to the product or service. Supervisors and maintenance staff who support all production are usually counted as overhead. Read about acquisition cost.

How do supplier contracts affect direct cost?

They set material and service prices, volume discounts and price change rules. If invoices drift from those terms, direct cost rises without anyone deciding it should. See Invoiceflow.

Have a question we have not answered? Ask the Expert

Schedule a demo

See your contracts run on one record.

  • 1 A 30 minute walkthrough Built around your team, whether that is procurement, legal, IT or finance.
  • 2 Your contracts, not ours Bring a few sample agreements and watch Aavenir AI extract and review them.
  • 3 ServiceNow or standalone We show the deployment that fits the systems you already run.

Prefer to talk first? Contact the team.