Direct material cost is the total cost to a company of all of the raw materials needed to manufacture products. It includes the cost of the materials themselves as well as related costs like packaging, transportation, storage, etc.
The components included in calculating the direct material cost are:
- Raw material cost – this is the cost of the actual materials themselves.
- Indirect tax – any taxes that need to be paid on top of the cost of the materials.
- Discounts – if the raw material suppliers offer any discounts or sale prices, the savings are subtracted from the direct material cost.
- Freight and storage – there are often additional costs involved in transporting the raw materials from the supplier to the factory, as well as storage costs if the inventory is kept off-site before it is needed.
- Packing and container – if the factory has to pay for the packing materials or the shipping containers used to transport the raw materials to them, this gets added to the direct material cost.
All of the costs of the components listed above are added together to result in the direct material cost:
Direct material cost = raw material cost + indirect tax – discounts + freight/storage + packing/container