Definition of Direct Materials
Direct materials are defined as:
- Traceable matter that is converted by a manufacturer into products
- Part of manufacturer's production costs
- A variable cost of a manufactured product
- Part of a manufacturer's inventory cost (along with the costs of direct labor and manufacturing overhead)
- A prime cost
The costs of direct materials are reported in the financial statements based on where they are:
- Raw materials not yet in production are reported/disclosed as raw materials inventory on the manufacturer's balance sheet
- Raw materials in the production area but the products are not yet completed, are included in the cost of the work-in-process inventory
- Raw materials in completed products that are not yet sold, are included in the cost of the finished goods inventory on the balance sheet
- Raw materials in products that are completed and sold, are included in the cost of goods sold on the income statement
Examples of Raw Materials
The direct materials for a bakery's products will likely be flour, sugar, eggs, milk, vegetable oil, spices, and other ingredients listed in the bakery's recipes.
The direct materials for a manufactured product will appear in each product's bill of materials.
Note: A manufacturer's indirect materials such as lubricants and other manufacturing supplies will be allocated to products along with other costs that are part of manufacturing overhead.