Direct costs are the expenses a business incurs that can be directly tied to the production of a good or the provision of a service. Direct costs are the expenses a business incurs to make a product or deliver a service, or when it buys a wholesale product for resale.
Accounting treatment:
- Method 1: Dynamic accounting software. (Gross Profit Sophisticated). In this case, there is no need for an opening and closing inventory accounting in Direct Costs sector since the software dynamical moves a cost component from inventory to cost of goods every time there is a sale.
- Method 2 - Basic accounting software (Simple method), where inventory recognition is only carried out at report time i.e. at 30 June inventory is counted and a journal is passed - Dr. Inventory on hand (balance sheet), Cr. Closing Inventory (profit loss).
For the Excel "Cost of Sales" , this is how it will present:
