Direct Materials are those materials that can be identified in the product and can be conveniently measured and directly charged to the product to the product.
Thus, these materials directly enter production and form a part of the finished product. For example, timber in furniture, cloth in dressmaking and bricks in building a house. The following are normally classified as direct materials.
(i) All raw materials like jute in the manufacture of gunny bags. Pig iron foundry, and fruits in the canning industry.
(ii) Materials specifically purchased for a specific job, process or order, like glue for bookbinding, starch powder for dressing yarn etc.
(iii) Parts of components purchased or produced, like batteries for transistor radios and tires for cycles.
(iv) Primary packing materials like cartons, wrappings, cardboard boxes, etc. used to protect the finish from climatic conditions or for secure handling inside the factory.
The cost of direct materials is an important factor in determining the overall cost of a product. Companies can control the cost of direct materials by negotiating lower prices with suppliers, reducing waste, and implementing just-in-time (JIT) inventory management practices.
Classification of Direct Materials
From the above discussion, it becomes clear that indirect materials like boxes etc., cannot be classified as direct materials. An example of indirect materials is consumables like fixed assets, high-speed diesel used in power generators etc.
The classification of materials into direct and indirect categories facilitates materials. Direct materials are usually high-value items as compared to indirect materials and need strict control and critical analysis to reduce their cost. On the other hand, simple control techniques are sufficient for indirect materials being low-value items.
However, in some cases, the material is a part of the finished product, yet it is not treated as direct materials; for example, sewing thread in dressmaking and nails in furniture making. This is because they are used in comparatively small quantities, and it would be futile elaboration to analyse them for the purpose of direct charge. Such materials are treated as indirect materials.
Thus, it can be concluded that the ease and the feasibility with which a material can be traced into the compositions of a finished product will determine what is to be treated as a direct material.
A direct material expense can be defined as a material expense that is directly related to goods or services in the production process. For example, we may consider the cost of buying the raw materials needed to make a part or a direct material cost will be considered. They are used to calculate the cost of goods sold (COGS), which is an important measure of profitability. COGS is calculated by adding the cost of direct materials, direct labour, and indirect costs.