Direct material

The direct material - stock used in production of items. Essential component in production process. Created on one's own or purchased from contractor. They are wearing out entirely in one workflow (National Association of Accountants 1986, p. 2).

The direct materials have features which distinguish them from the concept of commodity (Caplan D. 2006, p. 57-59):

• the necessity of performing production process pursuant to schedule exists,
• the possibility of bulk transport provides discounts for enterprise,
• the possibility of storing as safety supply exists.

The difference between finished commodity and the direct material

Commodities - purchased from contractor in order to further resale. The possibility of one's own goods creation with contemporaneous purpose for bulk sale or retail environment exists. The characteristic feature of commodities is the fact, that they are selling in immutable form. The possibility of its sorting or proper packing exists (National Council of Educational Research and Training 2013, p. 17).

Classification of the direct materials

From the point of view of an enterprise among materials we can distinguish (The Institute of Cost Accountants of India 2014, p. 308):

• fundamental materials - it shows the direct way of use i.e. the wood for furniture production. The fundamental packaging being indispensable part of a product i.e. bottle of a drink are also counted among fundamental materials..
• subsidiary materials - finishing materials, materials allowing permanent connection of individual parts, office materials.
• fuel - used in different purposes i.e. technological, economic or propulsive.
• spare parts of machines and devices - connected with exchange of old parts.
• packages - used for storage of products which are not integral part of a material.
• waste - oddments arsed form production.

Materials and commodities appraisal

Materials as well as commodities are prepossessing in account books at cost price. Nevertheless, enterprise has a possibility of purchased materials and commodities appraisal by its price as long as it influences on an assets and financial result value. Two ways of materials and commodities appraisal might be distinguished (National Association of Accountants 1986, p. 3):

• by real price of purchase - consists of amount receivable for vendor without deducting taxes from commodities and services as well as excise tax. The price is compounded by public burdens.
• by real price of obtain - consists of amount receivable for vendor without excise tax as well as without possibility of tax from commodities and services deducting. The price is compounded by costs connected with transport, embarkation and storage.
• by selling price - price comparable with similar or the same sort of article.
• by planned price - price prearranged by enterprise.
• by cost of creation - price contain costs providing direct relation with a product.

Register of materials and commodities

For purposes of register of materials and commodities the following accounting evidences are used (Baskerville P. (n.d.), p. 3):

• VAT invoice - purchase document,
• Pz document - adopting materials from outside i.e. the purchase of materials and its admission to a warehouse.
• Pw document - adopting materials from inside i.e. elimination of tangible assets,
• Wz document - materials issue outside,
• Rw document - materials expenditure for internal needs,
• Mn document - relocation of materials between warehouses,
• stocktaking protocol - information about excess or deficiency per diem of stocktaking.

Examples of Direct material

• Raw materials: This can include any materials used in the production process that are not part of the final product, such as wood for furniture, steel for cars, or plastic for toys.
• Packaging materials: This can include any materials used to package and protect the finished product, such as boxes, tape, labels, and shrink wrap.
• Components: This can include any parts or components that are used in the production process, such as screws, nuts, bolts, and electronic components.
• Supplies: This can include any consumable supplies that are used in the production process, such as lubricants, solvents, and adhesives.
• Tools and Equipment: This can include any tools or equipment used in the production process, such as drills, saws, and presses.

Advantages of Direct material

Direct material has several advantages:

• It is cost-effective, as it can be created on ones own or purchased from contractor with lower cost than finished goods.
• It is highly versatile, as it allows for customisation of the product or service to meet specific customer requirements.
• It allows for efficient production of goods and services, as it can be quickly and easily replenished when necessary.
• It reduces the need for extensive storage space, as it can be quickly replenished when needed.
• It is a convenient way to ensure the quality of the product, as it can be inspected and tested before it is used in production.

Limitations of Direct material

Direct materials have certain limitations which need to be kept in mind when considering their use in production. These include:

• The availability of the materials. Direct materials must be available in sufficient quantity and quality to ensure that production can continue without interruption.
• The cost of the materials. Direct materials are often a major expense for any production process, and must be considered when calculating the cost of production.
• The shelf life or durability of the materials. Direct materials may degrade over time or become damaged if stored incorrectly. This can affect the quality of the finished product.
• The environmental impact of the materials. Some materials may have a negative environmental impact, such as the release of toxic pollutants, and must be taken into account when selecting direct materials.

Other approaches related to Direct material

• Utilization of equipment and machines: Equipment and machines are the tools necessary for production. They are used to assemble, package and store the components of the product. They must be maintained and operated in a safe and efficient manner to ensure the production process runs smoothly.
• Labor: Labor is the most important factor of production. It requires the knowledge and skill of the workers to produce the desired output. The right labor force must be hired, trained, and monitored to ensure the highest quality of production.
• Raw materials: Raw materials are the main ingredient to the production process. They must be acquired, stored, and managed properly in order to ensure the quality of the final product.
• Overhead costs: Overhead costs include the cost of renting or leasing the production facility, purchasing materials, and maintaining the equipment. These costs must be managed in order to ensure the efficiency of the production process.

In conclusion, direct material is only one of the components necessary for a successful production process. Other components such as equipment, labor, raw materials, and overhead costs must also be taken into account in order to ensure the highest quality of the final product.

Direct material — recommended articles

Indirect material — Operating supplies — Types of packaging — Types of inventory — Production process — Storage and handling infrastructure — Secondary packaging — Internal transport system — Batch number

References

• Baskerville P. (n.d.). What are source documents in accounting?, Retrieved 2019, p. 3.
• Caplan D. (2006). Management Accounting Concepts and Techniques, University at Albany, State University of New York, New York, p. 57-59.
• Hall J.A. (2012). Accounting Information System, South-Western Cengage Learning, Mason.
• National Association of Accountants (1986). Definition and measurement of direct material cost, Montvale, N.J.: National Association of Accountants, p. 2-3.
• National Council of Educational Research and Training (2013). Accountancy: Company Accounts and Analysis of Financial Statements, Central Board of Secondary Education, New Delhi, p. 247.
• Smith J. (2007). Handbook of Management Accounting, GEE A Thomson Company, London.
• The Institute of Cost Accountants of India (2014). Fundamentals of Accounting. Study Notes., Repro India Limited, Mahape, p. 308.
• Walther L.M. (2009). Managerial and Cost Accounting, CreateSpace Independent Publishing Platform, California.

Author: Justyna Zalewska