Definition: Direct materials are raw materials that are made into finished products. These are not materials that are used in the production process. Direct materials are goods that physically become the finished product at the end of the manufacturing process. In other words, these are the tangible pieces or components of a finished product.
You can think of a direct material a single part of the finished product. For example, the Harley Davidson manufacturing plant orders raw materials like sheet metal and pipes from foundries and other metal suppliers. Harley then takes these raw materials bends, welds, and chromes them in order to turn them into a set of exhaust pipes. These pipes are considered direct materials because they directly contribute to the production of a finished product, a motorcycle.
So handle bars, fenders, pipes, gas tanks, and windshields are all considered direct materials in the production of a motorcycle. They are all components that can be traced back to the production of a finished product.
What Does Direct Material Mean?
It might be easier to think of the chain of events in a production process. Raw materials are purchased and turned into direct materials. These materials are then assembled and turned into finished goods. In this sense, direct materials can be considered goods in process inventory. Even though a set of handlebars is completely finished, the overall bike is still incomplete and a work in process.
Direct materials are typically referred to as a cost instead of an actual good or piece of inventory. This way managerial accountants can track the how much the company spends producing these goods and try to streamline the process. For instance, just-in-time inventory systems can reduce inventory costs because only the inventory needed for production is ordered and produced. Storage costs of direct materials can almost be eliminated.