What is Direct Material Cost?

Direct material cost is the cost of the raw materials and components used to create a product. The materials must be easily identifiable with the resulting product (otherwise they are considered to be joint costs). The direct material cost is one of the few variable costs involved in the production process; as such, it is used in the derivation of throughput from production processes. Throughput is sales minus all totally variable expenses.

Types of Direct Material Cost

Here are several types of direct material costs that are commonly encountered:

Raw materials. These are basic, unprocessed materials used to manufacture a product, such as lumber for furniture or steel for car parts. They are directly traceable to the final product and usually make up a significant portion of its cost.
Purchased components. These are pre-manufactured parts bought from suppliers and assembled into the final product, such as circuit boards in electronics or engines in vehicles. Since they are essential to the final product and used specifically for it, they are classified as direct material costs.
Packaging materials. Primary packaging materials, like bottles for beverages or boxes for electronics, are included as direct materials because they are necessary to complete the product. These materials directly protect or contain the product for sale.
Fabric or textiles. Used in industries like clothing, upholstery, or automotive interiors, fabric is a direct material cost. It is transformed into the finished product and is traceable to individual units.
Chemicals and ingredients. In food production, pharmaceuticals, or cosmetics, ingredients like flour, sugar, or active drug compounds are direct materials. These are consumed during production and form part of the final product's substance.
Metals and alloys. Industries like construction, automotive, and aerospace use materials such as aluminum, copper, or titanium. These are core structural elements in products and are traceable to specific items.
Glass and plastics. Used in products like windows, screens, containers, or appliances, glass and plastics are directly incorporated into the final product. Their cost is directly attributed to each unit produced.
Wood and wood-based materials. Common in furniture, cabinetry, and construction materials, wood and plywood are key raw materials. Because they are shaped into specific components for a product, their cost is treated as a direct material costs, handbags, and car seats. It is directly used to form, cover, or finish the product and is traceable to each unit produced.

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How to Calculate Direct Material Costs

To determine the amount of direct materials cost in a product, work with the engineering staff to create a bill of materials, which specifies the quantity of each raw material item and component included in a product. Then assign a standard cost to each item, based on recent prices paid for them (including freight and sales taxes), and add a reasonable allowance for scrap and spoilage. The total is the direct material cost of the product.

Direct Materials vs. Indirect Materials

Some costs are for materials that are not considered direct materials, and so are instead classified as indirect material costs. These materials are so immaterial as not to be worth tracing to a specific product, or cannot be clearly associated with a specific product. The data collection work required to trace these items to specific products would be excessive in relation to the extra information obtained, so businesses do not bother with it.

Examples of indirect materials are the rags and solvents used during the construction of a house, the grease used on machines that manufacture products, and the thread used in clothing.