Direct materials inventory definition

What is Direct Materials Inventory?

Direct materials inventory is the total amount of components on hand that have not yet been included in products. This is one of the three main classifications of inventory; the other two classifications are work-in-process inventory and finished goods inventory. The ending value of direct materials inventory may be stated in a separate line item on an entity's balance sheet, or it may be aggregated into a single inventory line item with the other two inventory classifications.

Best Practices for Direct Materials Inventory

Here are several best practices relating to the ongoing management of your direct materials inventory:

  • Review for obsolescence. Review the inventory periodically for obsolescence. It is essential to do this regularly, so that you can sell any identified inventory before it loses its value entirely.

  • Review turnover levels. Routinely examine the turnover for all types of direct materials inventory, to see if you have too much cash invested in an excessive amount of inventory. It may be possible to buy in smaller quantities to reduce this investment.

  • Reconfigure product designs. See if new product designs can use a common set of parts, so that you are investing in fewer stock keeping units. This should reduce your overall investment in inventory.

Terms Similar to Direct Materials Inventory

Direct materials inventory is also known as raw materials inventory.

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