Direct cost is a cost that can be attributed directly to a cost unit or cost centre. The cost of raw materials (e.g., cost of planks used in the manufacture of tables and chairs) is an example of a direct cost. This is because the cost of planks is traceable to the tables and chairs (cost unit) produced.
Indirect cost is the cost that cannot be attributed to a cost unit or cost centre. In the manufacture of tables and chairs, a supervisor may be employed to ensure that all tables and chairs produced meet a required standard before delivery to the customer. The supervisor's salary is not traceable to a particular cost unit but absorbed by all the tables and chairs produced. This is different from the salary that is paid to the carpenter who drives the nail into the wood to make it come out as a table or chair. In this illustration, while the salary of the supervisor is an indirect cost, the salary of the carpenter is a direct cost.