What do direct materials refer to in production?

Direct materials refer specifically to the raw materials and components that are directly used in the manufacturing of a product. They include all materials that can be physically and directly traced to the finished product. For instance, if a company manufactures furniture, the wood, fabric, and metal hardware used would all be considered direct materials because they are essential components that become part of the final product.

This definition distinguishes direct materials from labor costs, which involve wages for workers, and from financial expenditures for administrative purposes, which pertain to business operations outside the manufacturing process. Additionally, overhead costs include indirect expenses such as utilities or rent that support the production facility but are not directly tied to any specific product. Therefore, identifying costs related to direct materials is crucial for understanding production expenses and ultimately for pricing and profitability analysis.