Direct materials are those which can be easily be measured and traced to the manufacture of a product. Since these costs are quantifiable based on the product, they have a direct effect on the production cost and therefore on the final cost of the finished good.
A piece of furniture, for example, can be constructed from measurable amounts of timber, padding, and fabric covers – so these materials are considered to be direct materials. In a shoe manufacturing company, leather and cotton are also counted as direct materials.
Advantages
- They form an essential component of product costing, and without direct raw materials, no product can be manufactured.
- Very useful in the contribution analysis of a product which is computed by revenue minus the cost of goods sold to arrive at the gross profit margin
- They are easily traceable since they are the main component in order to manufacture a particular product.
- Plays a significant part in the budget prepared for the future;
- Is the deciding factor in computing the major ratios used for the management for analysis;
