Direct material

Definition

Direct material refers to the raw materials that are directly used in the production of a product and can be easily traced back to it. These materials form an integral part of the finished goods.

5 Must Know Facts For Your Next Test

1. Direct materials are included in the calculation of product costs under both variable and absorption costing methods.
2. An accurate estimate of direct material costs is essential for setting budgets and determining product pricing.
3. In an activity-based costing system, direct materials remain unaffected as they are traced directly to products rather than being allocated.
4. Direct material costs impact the calculation of predetermined overhead rates as they exclude indirect costs like overheads.
5. Effective management of direct materials can lead to significant cost savings and efficiency improvements in production.

Review Questions

• How do direct materials differ from indirect materials?
• Why is it important to accurately estimate direct material costs?
• How do direct materials affect the calculation of predetermined overhead rates?

Related terms

Indirect Material: Materials used in production that cannot be easily traced back to individual products.

Variable Costing:

A costing method where only variable manufacturing costs are included in product costs.

Absorption Costing:

A costing method where all manufacturing costs, including fixed overheads, are included in product costs.