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.