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Direct material cost is the amount of money a company has to spend on raw materials to make a product. To be part of direct material cost, raw materials have to be identifiable and used consistently. Most products have raw materials that are used infrequently, such as screws used to build a cabinet, so they are not part of this cost because of their lower usage. Businesses typically need this figure to know how much a product costs to make, so they know how much to charge and whether they are profiting.
In direct material cost, the main thing considered is the price of the raw materials used to make a product. For example, a dressmaker’s raw materials will be the fabrics used to make the articles of clothing. While the term "raw materials" may imply that the materials are raw and natural or unprocessed, they do not need to be. Companies that use a sizeable amount of plastic would consider it a raw material, simply because it is a basic element of their final product.
One aspect required for including raw materials in direct material cost is whether the materials are easily identifiable. For example, dye can be considered a direct raw material for a textile manufacturer, but the ingredients that make up the dye are not. This is because the ingredients are not easily identifiable, and the company may buy dye from different suppliers that make their dyes in different ways. Another aspect for raw materials to be direct raw materials is that they are used consistently.
Raw materials that are used infrequently, or those that make up a small part of the final product, are often not considered part of the direct material cost. When a company creates a product’s packaging, the ink used for printing and the cardboard for the box will be considered among this cost, but the tape or glue used to seal the packaging may not be. This is because, while these infrequently used raw materials increase the product’s price, the increase is considered insignificant compared to other more commonly used materials.
Direct material cost is used most frequently to figure out the price of making a product, excluding the cost of labor and shipping. If the material costs are much higher than labor and other costs, then this figure also may be used as a basis to set the selling price of the product. Another use for this cost measurement is to determine whether the company is making its money back in sales.