Definition
Direct materials can be referred to as the raw materials which are used to produce goods and services which the company manufactures for purposes of reselling.
They are the costs that are directly associated with the manufacturing process, and therefore, they can easily be traced to the production process.
Items that are listed as direct materials are mostly listed in the bills of material files for a particular product.
Bills of materials often include unit quantities and standard costs of all the material used in a respective product. Additionally, it may also include an overhead allocation.
Furthermore, direct material also includes scrap or spoilage that is incurred during the manufacturing process.
Any material which is used directly or indirectly with the manufacturing process is associated as a direct material.
For example, to manufacture a computer, there are various different parts involved. For all the parts that have been procured to manufacture this particular computer, it is important to categorize them as direct material.
Direct material, however, does not include materials that are considered as part of the general business overhead.
For example, the cameras installed for purposes of surveillance cannot be regarded as direct materials, because they are not directly associated with the production process itself.
Examples
Some prominent examples of direct materials include the following:
- Flour that is used to make biscuits
- The oil that is used for frying snacks
- Wood that is used to manufacture wooden table
- The cloth that is used to manufacture a suit
Direct Material and Overhead Allocation
Direct materials are often used as cost drivers to allocate overhead costs to their respective products. Indirect costs cannot be easily associated with a single product, and therefore, the direct material calculation is used as a cost driver, to make it easily traceable to a single product.
For example, if direct material is used as a cost driver, then the indirect costs are associated with respect to every quantity of the direct material that is used.
In other words, a manufacturing overhead can be traced to a product, depending on how much material that particular product utilizes.
For example, $0.5 of indirect costs is applied to every inch of cloth that is used for the manufacturing process.
Accounting Treatment
Direct materials are treated as product costs, and therefore, they are very important for categorization of Prime Costs, in the Manufacturing Account of a trading concern.
The amount that is recorded as direct materials is the amount which is actually used in the production process, as opposed to the amount that has been paid for, or the amount that the company has in inventory.
Direct material is also used as an important budgeting tool, as it is compared with the benchmarks that the company sets before the production cycle begins.
They are mostly seen under material yield variance or purchase price variance. This helps organizations to assess the overall quality of the direct material used, and the cost incurred to produce a certain product, in actual.
Q&A
1) Is direct material inventory ?
Yes, it is part of the inventories
2) Is direct material current asset?
Yes, it is current assets
3) Is direct material non-current assets?
No, it is the current assets
4) Is direct material cost of good sold?
No, it is the current assets and it will transfer to product cost when it is used.
