See Also:
Direct Cost vs Indirect Cost
Direct Labor
Cost Driver
Direct Labor Variance Formulas
Direct Material Variance Formulas
Absorption Cost Accounting
Direct Materials Definition
In accounting, direct materials are the resources used to make a product. You must clearly link these resources to the product you are producing. Direct material costs are one of the costs associated with producing a product. Furthermore, direct materials are in contrast to indirect materials. Indirect materials are materials used to produce a product not clearly linked or traceable to the final product.
Examples of direct materials include the following:
- Wood used to make tables
- Glass used to make windows
- Fabric used to make furniture
Direct Material and Overhead Allocation
Sometimes it may be appropriate to use direct materials as a cost driver to allocate indirect costs to a production process.
Indirect costs, such as overhead costs, are not directly traceable to the final product; however, they are necessary for the production of the process. Therefore, incorporate them in the overall cost of the product and then allocate them to the final product by way of a cost driver.
In production processes in which direct material is an appropriate cost driver, on can allocate indirect costs to the cost of units of output via direct material. The measurement of the cost driver depends on the type of material. If it’s wood, then the cost driver may be based on feet of wood used, or pounds of wood used.
Using direct materials as a cost driver requires quantifying the direct material with some physical or otherwise quantifiable measure. Then allocate indirect costs to the units of output using a cost driver rate, such as $2 dollars per foot of wood, or $0.40 per square foot of fabric, depending on what direct material you use and the specifics of the production process.
Source:
Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.
