What is Direct Materials - A quick explanation
In a typical manufacturing process, it’s important to understand the cost of ingredients or components. That’s why in the manufacturing world, these ingredients are referred to as "raw materials” or direct materials.
But how can Shopify brands measure and understand the cost associated with these materials? That’s what we get to learn from the direct materials used formula and related calculations in a simple-to-understand way.
Direct Raw Material Cost Formula
The Direct Material Cost Formula is pretty straightforward. You need to start with the amount of materials you had at the beginning of a period called Beginning Inventory. Then you need to add purchases made during that period and subtract the materials left over at the end, i.e., Ending Inventory. This calculation provides you with the total amount of Direct Materials utilized in your production.
It calculates the total cost of materials actually used in producing goods. Jumping straight into the exact formula:
Direct Material Cost = Beginning Inventory + Purchases during the period - Ending Inventory
This formula helps businesses understand the actual cost of materials consumed in the production process.
How Prediko Simplifies This Calculation for Shopify D2C Brands
Prediko Raw Material Planner allows you to set up or import your raw materials as well as your bill of materials (BOM) into Prediko within minutes.
Once your raw materials and BOM are uploaded, you can then create production orders that contain those raw materials and sent them to your suppliers.
Prediko tracks the usage of raw materials in production dynamically as you create production orders within the system and gives you alerts on when you need to reorder which raw materials to guarantee continued finished good production. We have also written a detailed guide on how to start with raw materials inventory management.
Interpreting the Value for Direct Materials Used & Applying For Your Brand
Understanding and applying the Direct Raw Materials Used Formula allows a company to accurately track the cost associated with the production materials. This information is helpful for:
- Knowing the exact cost of raw materials used in production helps in setting up product prices.
- Budgeting: Predicting future raw material requirements and their costs.
- Assessing the raw material cost components as part of an overall inventory management strategy.