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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Direct Materials vs. Consumables
Consumables are not considered to be direct material. Consumables are those supplies consumed in the general production process, such as machine oil. These items vary with production volume, but cannot be traced back to specific units of production. Even if it were possible to trace consumables to specific products, it would not be cost-effective to do so, given the incremental cost of the additional tracking work.
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
There is no direct materials concept in a services organization, where labor is the primary cost of an organization.