Direct materials definition
/What are Direct Materials?
Direct materials are those materials and supplies that are consumed during the manufacture of a product, and which are directly identified with that product. Items designated as direct materials are usually listed in the bill of materials file for a product. The bill of materials itemizes the unit quantities and standard costs of all materials used in a product, and may also include an overhead allocation.
The direct materials concept includes any scrap and spoilage incurred during the manufacturing process. Scrap is the excess unusable material remaining after a product has been manufactured. Spoilage is goods that are damaged.
Direct materials do not include any materials that are consumed as part of the general overhead of a business. For example, the air filters used in the ventilation system of a manufacturing facility are not direct materials; they are instead included in manufacturing overhead. Conversely, the wood used to construct furniture that is to be sold is classified as direct materials.
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Direct Materials Use in Throughput Analysis
Direct materials is an important concept in throughput analysis, where throughput is the revenue generated by a product sale, less all totally variable costs. In most situations, the only totally variable costs associated with a product are its direct materials. Direct labor is not totally variable in most situations, and so is usually not included in the throughput calculation.
Presentation of Direct Materials
The direct materials cost may be included as a separate line item in the cost of goods sold section of the income statement. It is also one of the few line items included in a contribution margin analysis.
Direct Materials Variances
Direct materials are measured using two variances, which are noted below.
Material Yield Variance
The material yield variance is the difference between the actual amount of material used and the standard amount expected to be used, multiplied by the standard cost of the materials.
Purchase Price Variance
The purchase price variance is the difference between the actual price paid to buy an item and its standard price, multiplied by the actual number of units purchased.