Direct materials are the traceable matter used in manufacturing a product. The direct materials for a manufacturer of dessert products will include flour, sugar, eggs, milk, vegetable oil, spices, and other ingredients in the recipes. In manufacturing, the direct materials are listed in each product's bill of materials. (Indirect materials such as oil for greasing the baking pans, etc. will likely be viewed as part of the manufacturing supplies and will be allocated to products along with other manufacturing overhead.)

The direct materials contained in manufactured products are also defined as:

  • a product cost (along with the costs of the direct labor and manufacturing overhead)

  • an inventoriable cost (along with the costs of direct labor and manufacturing overhead)

  • a prime cost (along with the cost of direct labor)

The costs of direct materials should be reported in the financial statements according to their location or position:

  • if not yet put into production, report as raw materials inventory on the balance sheet

  • if put into production but the goods are not completed, report as part of the cost of work-in-process inventory on the balance sheet

  • if put into production and the goods are completed but not yet sold, report as part of the cost of the finished goods inventory on the balance sheet

  • if put into production and the goods have been completed and sold, report as part of the cost of goods sold on the income statement

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