Direct Material Cost

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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.

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Table of contents

Components of the Direct Material Expense

Components of the Direct Material Expense
  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 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: Costs incurred by the company for the freight and the storage charges are included in this cost if 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 concerning the raw material and the cost of other components incurred to purchase the material related directly to the manufacturing of the company's different products will become part of the direct material cost of the company.

In the case of 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 to manufacturing the company's product. 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 the 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. The company's product cost 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 cannot judge 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, whereas 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.
  • To increase the efficiency in the production process and reduce the company's cost, managers track the direct cost incurred during the production as they watch 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 cost components of the company. In contrast, the other product cost components cost includes direct labor cost and the manufacturing overhead costs total cost incurred by the company concerning the raw material along with the cost of other components incurred to purchase the material related directly to the manufacturing of the different products of the company.