These are direct costs that are incurred in the production of income to a business.  In a manufacturing business these are usually stock, materials and freight.   In a retail business this direct cost is product purchased from a wholesaler.  Alternatively,  in a service based industry (let's say a surveyor) this direct cost might be wages.   By "direct costs"  we mean costs that have a very close relationship to sales activity – a movement in sales will see a movement in direct costs.