How to Identify Direct Material Cost?

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Materials, which are used in any manufacturing process, may be classified into two categories: (I) Direct materials (2) indirect materials

Direct Materials

Direct materials are those materials which satisfy the following characteristics:

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(a) They can be identified with the finished product.

(b) They vary directly with the volume of output.

They form part and parcel of finished product.

They can be measured in terms of production units.

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They are quite significant in amount and constitute a major potion of total cost.

How to Identify Direct Material Cost:

In addition to the above characteristics, the following principles are followed for identifying the direct material cost:

(i) The cost of all materials specifically purchased for a particular process, job is considered as direct material cost.

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(ii) The cost of all materials passing from one process to the other in process costing.

(iii) All primary packing materials, e.g… Cardboard, boxes, cartons, etc. are also treated as direct material cost.

(iv) All costs incurred for bringing the materials and making it ready for consumption are also the part of direct material cost.

Direct material, production material or process material constitutes direct material cost, whereas indirect material constitutes a part of overheads.

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Examples:

The specific examples of direct materials are:

(a) Jute in manufacturing gunny bags,

(b) Steel in manufacturing cars,

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(c) Timber in manufacturing furniture,

(d) Fruits in manufacturing jams,

(e) Polythene grandees in manufacturing plastic product,

Cotton in manufacturing cotton clothes, etc. However, some materials are not direct materials even if they form part of the finished products. For example, sewing thread in dress making and nail in furniture making. This is because they are used in very small quantities and trivial value. Such materials are treated as indirect materials.

Indirect Material

Materials are said to se indirect when a direct relationship cannot be established between materials used with the units produced. They cannot be easily identified with finished goods. Indirect materials are ancillary to production. Indirect materials cost is considered as part of overheads.

Examples:

The following are the examples of indirect materials:

(a) Lubricating oil, (b) cotton waste, (c) Grease, (d) Small tools, (e) Stationery in factory or office, etc.

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