A direct cost can be reasonably and unambiguously traced to a specific product, service, or job. Production labour assigned to a particular product, raw materials that go into it, and tools consumed in making it are direct costs of that product.
The contrast is the indirect cost (or overhead): costs the business incurs to keep operating but that can’t be attributed cleanly to any single output — utilities, rent, IT, HR, executive salaries. Indirect costs have to be allocated across products via some accounting rule (per labour-hour, per square foot, per machine-hour).
Why the distinction matters: when pricing a product or evaluating a project, direct costs are what go in unambiguously. Indirect costs also have to be covered — the business won’t survive otherwise — but they show up via allocation rules that involve judgment, not measurement. Two accountants applying different allocation methods will arrive at different reported “cost per unit” for the same product. Direct costs are the part both accountants will agree on.
In an Income statement, direct costs roll up into cost of goods sold (COGS), while indirect costs sit in operating expenses (SG&A, depreciation, etc.). The gap between net sales and COGS is the gross profit; subtract operating expenses to get operating income.
See Indirect cost, Variable cost, Fixed cost for related cost taxonomy.