Calculating Direct Materials Used: A Comprehensive Guide for Accurate Cost Determination

(In a food manufacturer’s business the direct materials are the ingredients such as flour and sugar; in an automobile assembly plant, the direct materials are the cars’ component fixed assets parts). Assume ABC incurred $88,000 in direct labor and $90,000 in manufacturing overhead. Total costs incurred in the manufacturing process would then be $345,000 as shown below. We’ll assume for this example that all raw materials are direct materials, just to simplify the calculations.

Components of the Calculation

The amount of the property tax bill did not depend on the number of units produced or the number of machine hours that the plant operated. Although the fixed manufacturing overhead costs present themselves as large monthly or annual expenses, they are part of each product’s cost. Variable manufacturing overhead costs will increase in total as output increases. An example is the cost of the electricity needed to operate the machines that cut and sew the denim. Another example is the cost of the manufacturing supplies (such as needles and thread) that increase when production increases. We will assume that these variable manufacturing overhead costs fluctuate in response to the number of direct labor hours.

Why Accurate Tracking Matters

Direct material is the raw material that is directly used to produce an item. To calculate the cost of materials used, you get the sum of every direct material cost consumed in the accounting period. The account for direct materials incorporates the cost of materials used and HVAC Bookkeeping not materials purchased to estimate the production cost. These purchases are crucial to figure out the cost of direct materials used. Smart buying keeps production costs down and helps factories run smoothly.

Calculating Direct Materials Used: An Essential Step for Accurate Cost Analysis

A standard cost system establishes predetermined costs for direct materials, direct labor, and overhead. Variances between the standard costs and actual costs are then analyzed to identify areas for improvement. For direct materials, variances could arise from price differences or usage inefficiencies. Thus the direct material cost is among the significant product cost components of the company.

This in total manufacturing cost formula turn can also cause an unfavorable fixed manufacturing overhead volume variance. We begin by determining the fixed manufacturing overhead applied to (or absorbed by) the good output produced in the year 2024. Recall that we apply the overhead costs to the aprons by using the standard amount of direct labor hours.