How Do You Record Direct Materials Used?
Master the essential accounting process for tracking and recording direct materials consumed in production for accurate financials.
Recording the use of direct materials is important for manufacturing businesses. This provides a clear picture of production costs, important for financial reporting and cost management. Tracking these materials from purchase to finished product allows companies to make informed decisions about pricing, profitability, and resource allocation.
Understanding Direct Materials
Direct materials are raw materials that become an integral part of a finished product with easily traceable costs. They are primary components that define the product. For example, wood for a chair or fabric for a shirt are direct materials, as they are physically present in the final item and their cost is significant.
In contrast, indirect materials are used in production but do not become a significant physical part of the finished product, or their cost is not easily traceable. Examples include lubricants for machinery, cleaning supplies, or small amounts of glue. Indirect materials are necessary for production, but their costs are typically grouped with other manufacturing overhead expenses.
The Inventory Flow of Direct Materials
Direct materials move through several inventory accounts in a manufacturing process, reflecting their transformation from raw goods to finished products. It begins when materials are purchased and recorded in the Raw Materials Inventory account, which holds the value of materials awaiting production.
As direct materials are requisitioned for manufacturing, their cost is transferred out of Raw Materials Inventory. These costs move into the Work-in-Process (WIP) Inventory account, which represents the costs of products currently undergoing manufacturing but not yet complete.
Once production is finished and goods are ready for sale, their accumulated costs (direct materials, direct labor, and manufacturing overhead) are transferred from Work-in-Process Inventory to Finished Goods Inventory. This account holds the cost of completed products awaiting sale. This flow ensures all production costs are captured and tracked through inventory stages.
Journaling the Use of Direct Materials
Recording the use of direct materials involves a specific journal entry reflecting their movement from storage into active production. When direct materials are issued from Raw Materials Inventory, Work-in-Process Inventory is debited, and Raw Materials Inventory is credited. This increases the value of goods being manufactured and decreases raw materials in storage. For example, if $10,000 of wood moves from raw materials to assembly, the entry debits Work-in-Process Inventory for $10,000 and credits Raw Materials Inventory for $10,000.
To determine the amount of direct materials used during a period, a calculation is performed. This calculation starts with the Beginning Raw Materials Inventory. To this, Raw Material Purchases are added. From this total, the Ending Raw Materials Inventory is subtracted. The resulting figure is the “Cost of Direct Materials Used.” For instance, if a company had $5,000 in Beginning Raw Materials Inventory, purchased an additional $20,000 in raw materials, and ended the period with $3,000 in raw materials, the cost of direct materials used would be $22,000 ($5,000 + $20,000 – $3,000).
This calculation and journal entry align with generally accepted accounting principles (GAAP), which require accurate measurement and reporting of inventory costs, including direct materials. The Internal Revenue Service (IRS) also mandates consistent inventory valuation methods for tax purposes, impacting the cost of goods sold and taxable income. Businesses must maintain detailed records of material requisitions and inventory counts to support these entries and calculations, ensuring financial statements reflect production activities and comply with regulatory requirements.