What is considered a direct cost in business?

The correct answer is raw materials purchased for manufacturing because direct costs are expenses that can be directly traced to the production of specific goods or services. In the context of manufacturing, raw materials are essential components that are directly used in the creation of a product. For example, if a company produces furniture, the wood, fabric, and other materials used to create each piece of furniture are considered direct costs.

This direct relationship makes raw materials a key part of calculating the cost of goods sold and is critical for determining profitability on a per-product basis. Understanding direct costs is essential for budgeting and financial analysis, as they fluctuate with production volumes, allowing businesses to make informed decisions regarding pricing and scaling.