Direct Costs

Direct Costs

 

Except in industries with heavy fixed capital investments, direct costs normally constitute the major proportion of product or service costs and are the more easily traceable. Thus, they generally serve as the basis on which sellers allocate their overhead costs. An astute supply management therefore must investigate a seller’s direct costs carefully. A tiny reduction here (because they are relatively large) is worth more (price wise) to the buying firm than is a major reduction in the percentage of profit.