Direct Cost vs Indirect Cost
Direct Labor Variance Formulas
Direct Material Variance Formulas
Absorption Cost AccountingDirect Materials Definition
In accounting, direct materials are the resources used to make a product. These resources must be clearly linked to the product being produced. Direct material costs are one of the costs associated with producing a product. Direct materials are in contrast to indirect materials, which are materials used to produce a product that are not clearly linked or traceable to the final product.
Examples of direct materials include wood used to make tables, glass used to make windows, fabric used to make furniture, etc. Direct Material and Overhead Allocation
Sometimes it may be appropriate to use direct materials as a cost driver to allocate indirect costs to a production process.
Because indirect costs, such as overhead costs, are not directly traceable to the final product, but they are necessary for the production of the process and thus must be incorporated in the overall cost of the product, must be allocated to the final product by way of a cost driver.
In production processes in which direct material is an appropriate cost driver, indirect costs can be allocated to the cost of units of output via direct material. The measurement of the cost driver depends on the type of material. If it’s wood, the cost driver may be based on feet of wood used, or pounds of wood used.
Using direct materials as a cost driver requires quantifying the direct material with some physical or otherwise quantifiable measure. The indirect costs would then be allocated to the units of output using a cost driver rate, such as $2 dollars per foot of wood, or $0.40 per square foot of fabric, depending on the direct material being used and the specifics of the production process. Source:
Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.