Direct Material

Direct Material Definition

Direct material refers to the raw materials that are directly used in the production process of goods and/or services of a company and are an essential component of the finished goods manufactured. Direct Material Costs are reported in the trading account debit side under the head “cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more.” They are also referred to as the expenditures incurred to make a particular product that can trace back to its original form.

It can be in physical form or can be in artificial form like technology. E.g., In a company like Amazon, the main cost of the company is to build a system so that it can reach the maximum number of people across the globe. Here the technology cost will be looked at as the direct materials since without setting up a proper technical infrastructure, the company will not be in a position to sell the products on the platform. In cost accountancyCost AccountancyCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more, it is more studied in detail since it directly has an impact on the final product costing.

Direct-Material

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Types

They are broadly divided into the following categories.

Direct-Material-Types

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  • Raw Materials: Raw Materials are the base materials used in the manufacturing process to make the finished goods.
  • Work in Process: WIP refers to the direct materials used in the process which are under unfinished form and require additional processing to turn them into a finished product.
  • Finished Goods: These are the goods which are ready for consumption or sales.

Examples of Direct Material

Advantages

Disadvantages

The cost cannot be avoided since it forms the crust of the manufactured product, and an increase in the direct materials, costing eventually ends up in an increase in the price of the goods sold.

Conclusion

Direct materials form a very crucial element of the product costing of the company since even a minor change in it may result in a massive financial impact on the profit and loss of the company. The cost cannot be avoided and is often used in standard costingStandard CostingStandard cost is an estimated cost determined by the company for the production of the goods and services or for performing an operation under normal circumstances and are derived by the company from the historical analysis of the data or from the time and the motion studies.read more or process-costing methodologies to arrive at the effective cost of the product so that the company can fix up the selling price. If the cost is too high, it may suggest improvements in it to curb it.

This article has been a guide to what is direct material and its definition. Here we discuss the examples of direct material along with its types, advantages, and disadvantages. You can earn more about financing from the following articles –

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