What is Direct Materials Inventory?

//What is Direct Materials Inventory?
What is Direct Materials Inventory? 2017-10-02T20:37:37+00:00

Definition: Direct materials inventory is all physical components that a company owns that will go into making a product, excluding those that are in finished products or work-in-process inventory. In other words, it is the amount of material that the company has on hand.

What Does Direct Materials Inventory Mean?

What is the definition of direct materials inventory? DMI is used in order to keep track of the amount of total physical manufacturing or service inputs an organization has in stock in order to manufacture goods or produce services. It is important to keep track of this because it helps the organization to manage inventory costs while also making sure that supplies are ordered at the appropriate time to meet the demands of the business. DMI is also used for financial reporting purposes.

Let’s look at an example.

Example

Evan is the CEO of a small manufacturing company in Chicago. His beginning inventory for the year was 500 units.

Over the course of the year, his company purchased 200 new units of inventory and used 450 to make products that are now finished goods. As of today, 150 units of direct materials inventory are considered to be in work-in-process. How many units of direct material inventory does Evan have today?

In order to determine Evan’s amount of inventory, the inventory that he purchased over the course of the year should be added to the inventory that he had on hand at the beginning of the year.

500 units + 200 units = 700 units

This gives Evan 700 total units of inventory. Next, any finished goods or work-in-process inventory should be subtracted from this total.

700 units – (450 + 150) units = 100 units

Today, Evan had 100 units of inventory. Now that he knows this number, he can use it to make decisions about ordering supplies and inventory management.

Summary Definition

Define Direct Materials Inventory: Direct materials inventory means the parts that a company has on hand that go into making finished products.