Definition: Direct material costs are expenditures for materials that can be traced back to the products that they produce. These are costs that are easily followed through the manufacturing process to the finished goods that they are made into. In other words, it’s the exact dollar amount spend on direct materials in the production process.
What Does Direct Material Cost Mean?
Tracking direct costs through the manufacturing process is a key way to streamline efficiencies and cut costs. Managerial accountants evaluate how these materials are purchased, assembled, and the operations it takes to integrate them into the finished product. Let’s take a look at an example.
Example
You can think of a direct material as a component piece of a finished product. For example, a finished computer has many different parts and components inside of it. There is a hard drive, motherboard, RAM, video card, processor, and many other components. Each one of the pieces needs to be individually manufactured and ends up in the finished computer as a whole unit.
Cost accountants analyze the production processes and costs related with making these components to see if they can streamline the operations even further. This could be changing the design of the component or product. It could also mean changing the design of the assembly process itself.
An example of this would be Apple’s unibody Macbook laptop design. Instead of making clamps, clips, and other fasteners to hold the components to the inside of the computer enclosure, Apple designed them into the frame of the computer body. This cuts out the need for extra clips and brackets. It also saves the assemble time of the assemblers. Since all the brackets are “pre-installed,” they can simply bolt on a part without having to worry about a bracket.
By tracking and analyzing direct material costs, managerial accountants can make simple changes like this to speed up production time and cut costs.
