Direct Materials Used Formula

Direct Materials Used Formula Definition

Direct material used refers to raw materials, which when put together become a product. E-commerce businesses track the raw materials involved in making the product by listing them in the bill of materials to estimate cost of production.

Significance of Direct Materials Used Formula

Direct materials form the building blocks of a product that’s ready for sale. The Direct materials used formula is significant in the following ways:

  • It is the key variable cost that changes with production volume
  • Direct materials are an integral part of the costing system

Application of Direct Materials Used Formula

Using the direct materials used formula helps companies determine their budget. Some other applications for the direct materials used formula include:

  • The result of the direct material used formula represents the company’s variable cost
  • It helps e-commerce business determine the reorder point or the inventory level to keep production going on
  • It is used to calculate the gross margin, which helps in calculating profitability.

Direct Materials Used Formula

Direct Material Used Formula = 

Beginning DM Inventory + DM Purchases – Ending DM Inventory 

Where, 

Beginning Direct Material Inventory = Unused raw materials at the month or year’s beginning.

Direct Material Purchases = Purchases made in between the production 

Ending Direct Management Inventory = The remaining inventory at the month or year-end

Understanding With the Help of an Example

Suppose you require ₱1000 of inventory at the beginning of manufacturing a product (for example, toys). It includes fabric, cotton, beads, needles, and many other materials. Then you have the purchases or expenses in between. For example, shipping, packing, delivering, and so on. It cost you  ₱700 in total.

Therefore, you’ve generated  ₱1000 +  ₱700 =  ₱1700 of expenses.

Lastly, there are  ₱300 in materials left at the end of the month, which means they did not use up in the process.

Hence, your direct materials cost would be

 ₱1700 –  ₱300 =  ₱1400

Inference

You can make choices with your inventory that has to be used. You can also cut down some costs from inventory if it exceeds your limit. Moreover, you have a clear picture of all the raw materials required monthly or yearly. 

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