WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Accounting Tutorials » Budgeting Tutorials » Direct Material Cost

Direct Material Cost

By Madhuri ThakurMadhuri Thakur | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

What is Direct Material Cost?

Direct Material Cost is the total cost incurred by the company in purchasing the raw material along with the cost of other components including packaging, freight and storage costs, taxes, etc. that are related directly to the manufacturing and production of various products of the company.

Components of the Direct Material Expense

Direct Material Costs Components

  1. Raw Material Cost: It includes the cost incurred by the company to acquire the raw material required for the production of goods.
  2. Indirect Tax: There are different types of indirect taxes which are included in the invoice that is payable to the seller by the buyer of the goods. So, these costs also form part of the direct cost of the company.
  3. Discounts: There are different types of discounts offered by the supplier of the raw material to the buyer, such as cash discounts, trade discount, and quantity discounts. These discounts reduce the overall expense of the material and thus are subtracted while calculating the direct material expense of the company.
  4. Freight and Storage Charges: Cost incurred by the company for the freight and the storage charged are included in this cost in case the same is included in the price as per the invoice or can be easily prorated according to its units or weight.
  5. Packing and the Container Charges: The expense incurred by the company for the non-returnable material used for packing or for the containers used to get the material from the supplier is included in the direct material expense of the company.

Calculation Example of the Direct Material Costs

From the information of the transaction given below for the company A ltd. for October 2019, calculate the total direct material costs of the company for the month ending on October 31, 2019.

  • The total cost of raw material purchased: $ 550,000
  • Indirect taxes as mentioned in the invoice: $ 70,000
  • Wages paid to the employees that are involved directly in the production activities of the company: $ 150,000
  • Packing and container charges paid, as mentioned in the invoice: $ 5,000
  • Freight inward paid: $7,000

Solution

The total cost incurred by the company with respect to the raw material along with the cost of other components incurred to purchase the material that is related directly with the manufacturing of the different products of the company will become part of the direct material cost of the company.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

In the case of the company A ltd, all the expenses mentioned will be included in the direct material costs except the cost incurred for paying the wages to the employees. Wages paid will be considered while calculating the direct labor expense as they are related directly with the manufacturing of the product of the company. Still, the same will not form the part of the direct material expense.

Direct Material Costs Example

  • =550000+70000+5000+7000
  • =632000

Advantages

The various advantages are as follows:

  • Segregating the value of the direct material from the total material expense incurred by the company helps in knowing entire raw material or the other cost incurred for purchasing the materials by the company that relates directly with the production of the goods in the company where the cost of material left after subtracting the direct material cost out of total material costs will be an indirect material cost incurred by the company.
  • It is an essential component of the company’s product cost, and the product cost of the company cannot be calculated in case the amount spent on direct material is not available.

Disadvantages

The various disadvantages are as follows:

  • There prevails some of the cost of material where the person concerned is unable to judge that whether the cost incurred is the direct material or the indirect material expense. If any of such incidences is there, then there are chances that the direct material expense calculated is wrong.

Important Points

The different vital points are as follows:

  • It is among the significant components of a company’s product cost, where the other product cost components cost includes direct labor cost and the manufacturing overhead costs.
  • A direct material expense incurred by the company includes the amount paid for purchasing the raw material used for the production, indirect taxes paid on raw material, packing and container charges paid to get the supply of the raw material, freight inward charges paid, etc.
  • In order to increase the efficiency in the production process and reducing the cost of the company, managers track the direct cost incurred during the production as they watch that how the purchased materials are getting converted into the finished products in the company thereby streamlining the process by making the necessary changes wherever required.

Conclusion

Thus the direct material cost is among the significant product costs components of the company where the other product cost components cost includes direct labor cost and the manufacturing overhead costs total cost incurred by the company with respect to the raw material along with the cost of other components incurred in order to purchase the material that is related directly with the manufacturing of the different products of the company.

Recommended Articles

This article has been a guide to What are Direct Material Costs? Here we discuss components of direct material expenses along with an example, advantages, and disadvantages. You can learn more from the following accounting articles-

  • Bill of Materials
  • Formula for Direct Labor
  • Direct Cost vs Indirect Cost
  • Inventoriable Cost Definition
14 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More