Direct Materials are costs directly attributable to each production unit, compared to standard costs to determine production variances. Variations are investigated to determine causes, and can affect profits. Direct material inventory is used to derive direct material price and usage variations. Direct materials are connected to production variations affecting profits.
Direct Materials is a term used in cost accounting when determining all costs directly attributable to each production unit, cost center, or work order. These actual costs are compared to standard costs and production variances are determined. Unfavorable variations are usually investigated further to determine the causes.
A subtopic of cost accounting is standard costing. This is the method of comparing the actual costs of a product to a predetermined standard cost. Standard direct material, direct labor, and manufacturing overhead costs are applied to production units and actual costs are compared.
There are almost always production variances and these are subjected to a variance analysis. Unfavorable production deviations usually indicate to management that the company’s profits will also be adversely affected. Generally, the faster they discover these variations, the sooner they can try to correct the cause.
Direct materials are taken from a direct material inventory, which is one of the accounting items that enter production units. Two variations are derived: direct material price variation and direct material usage variation. The direct change in material price is the actual price minus the standard price multiplied by the actual quantity of goods produced in a period of time.
Direct material usage variance, on the other hand, involves actual production units minus standard production units multiplied by standard price. It is also known as direct material quantity deviation or direct material efficiency deviation. A favorable variance would be when actual costs per unit are less than estimated standard costs. The opposite would be valid for an unfavorable variation.
Generally, direct materials are a cost connected to an inventory account. Furthermore, they are connected to production variations that directly affect a company’s profits in a favorable or unfavorable way. Other costs treated similarly include direct labor, variable manufacturing overhead costs, and fixed manufacturing costs.
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