What are direct materials?
/Direct material is the physical items built into a product. For example, the direct materials for a baker include flour, eggs, yeast, sugar, oil, and water. The direct materials concept is used in cost accounting, where this cost is separately classified in several types of financial analysis. Direct materials are rolled into the total cost of goods produced, which is then subdivided into the cost of goods sold (which appears in the income statement) and ending inventory (which appears in the balance sheet).
What Costs are Included in Direct Materials?
The direct material classification typically includes all materials physically present in a finished product, which is raw materials and sub-assemblies. However, that is not the full extent of direct materials. In addition, direct materials include that amount of scrap and spoilage normally encountered during the production of goods. If excessive amounts of scrap and spoilage are encountered, these are not considered part of the materials directly associated with a product, but rather as a general cost of production.
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Material Yield Variance
The amount of direct material used is incorporated into the material yield variance, which is one of the most useful of the classic cost accounting variances. Also, the difference between the actual cost of direct materials and its expected cost is measured with the purchase price variance.
How Direct Materials are Used to Formulate the Contribution Margin
The cost of direct materials is also used in the formulation of contribution margin, since it is nearly the only subtraction from sales when arriving at the contribution margin.
Direct Materials in a Service Organization
In a service organization, there are generally no traditional direct materials like those found in manufacturing, but certain tangible items can still be classified as direct materials if they are directly used in delivering the service. For example, a dental clinic may use dental supplies such as fillings, crowns, or cleaning materials directly on patients during procedures. Similarly, a catering company uses food ingredients as direct materials in preparing meals for clients. While the primary output of a service organization is intangible, any physical goods that are consumed or incorporated directly into the service provided can be considered direct materials. These direct materials are typically included in the calculation of service costs to accurately determine profitability.
FAQs
What is the difference between direct materials and consumables?
Direct materials are materials that can be directly traced to a specific product or service and form an integral part of the finished output. Consumables are indirect materials that support the production process but are not economically traceable to individual units, such as supplies or maintenance items. As a result, direct materials are included in product cost, while consumables are typically treated as overhead.