Definition of direct material

direct material

a readily identifiable part of a product; the cost of such a part

Direct materials cost

The cost of all materials used in a cost object, such as finished goods.

Direct materials mix variance

The variance between the budgeted and actual mixes of
direct materials costs, both using the actual total quantity used. This variance isolates
the unit cost of each item, excluding all other variables.

product cost

This is a key factor in the profit model of a business. Product
cost is the same as purchase cost for a retailer or wholesaler (distributor).
A manufacturer has to accumulate three different types of production
costs to determine product cost: direct materials, direct labor, and
manufacturing overhead. The cost of products (goods) sold is deducted
from sales revenue to determine gross margin (also called gross profit),
which is the first profit line reported in an external income statement
and in an internal profit report to managers.

absorption costing

a cost accumulation and reporting
method that treats the costs of all manufacturing components
(direct material, direct labor, variable overhead, and
fixed overhead) as inventoriable or product costs; it is the
traditional approach to product costing; it must be used for
external financial statements and tax returns

conversion cost

the total of direct labor and overhead cost;
the cost necessary to transform direct material into a finished good or service

joint cost

the total of all costs (direct material, direct labor,
and overhead) incurred in a joint process up to the splitoff point

normal cost system

a valuation method that uses actual
costs of direct material and direct labor in conjunction with
a predetermined overhead rate or rates in determining the
cost of Work in Process Inventory

overhead

any factory or production cost that is indirect to
the product or service; it does not include direct material
or direct labor; any production cost that cannot be directly
traced to the product

prime cost

the total cost of direct material and direct labor for a product

standard cost system

a valuation method that uses predetermined
norms for direct material, direct labor, and overhead
to assign costs to the various inventory accounts and
Cost of Goods Sold

variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns

Cost of goods sold

The charge to expense of the direct materials, direct labor, and
allocated overhead costs associated with products sold during a defined accounting
period.

Direct estimate method

A method of cash budgeting based on detailed estimates of cash receipts and cash
disbursements category by category.

Direct lease

Lease in which the lessor purchases new equipment from the manufacturer and leases it to the
lessee.

Direct paper

Commercial paper sold directly by the issuer to investors.

Direct placement

Selling a new issue not by offering it for sale publicly, but by placing it with one of several
institutional investors.

Direct quote

For foreign exchange, the number of U.S. dollars needed to buy one unit of a foreign currency.

Direct search market

Buyers and sellers seek each other directly and transact directly.

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.

Indirect quote

For foreign exchange, the number of units of a foreign currency needed to buy one U.S.$.

Materials requirement planning

Computer-based systems that plan backward from the production schedule
to make purchases in order to manage inventory levels.

Raw material supply agreement

As used in connection with project financing, an agreement to furnish a
specified amount per period of a specified raw material.

Bill of materials

A listing of all the materials and quantities that go to make up a completed product.

Direct costs

Costs that are readily traceable to particular products or services.

Indirect costs

Costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.

Raw materials

Unprocessed goods bought for manufacture, part of inventory.

Direct method

A method of preparing the operating section of the Statement of Cash Flows that uses the company’s actual cash inflows and cash outflows.

Direct write-off method

A method of adjusting accounts receivable to the amount that is expected to be collected by eliminating the account balances of specific nonpaying customers.

Indirect method

A method of preparing the operating section of the Statement of Cash Flows that does not use the company’s actual cash inflows and cash outflows, but instead arrives at the net cash flow by taking net income and adjusting it for noncash expenses and the changes from last year in the current assets and current liabilities.

bill of materials

a document that contains information about
the product materials components and their specifications
(including quality and quantities needed)

direct cost

a cost that is distinctly traceable to a particular cost object

direct costing

see variable costing

direct labor

the time spent by individuals who work specifically
on manufacturing a product or performing a service;
the cost of such time

direct method

a service department cost allocation approach
that assigns service department costs directly to revenueproducing
areas with only one set of intermediate cost
pools or allocations

indirect cost

a cost that cannot be traced explicitly to a particular
cost object; a common cost

material price variance

total actual cost of material purchased
minus (actual quantity of material  standard
price); it is the amount of money spent below (favorable)
or in excess (unfavorable) of the standard price for the
quantity of materials purchased; it can be calculated based
on the actual quantity of material purchased or the actual
quantity used

material quantity variance

(actual quantity X standard price) - (standard quantity allowed  standard price);
the standard cost saved (favorable) or expended (unfavorable)
due to the difference between the actual quantity
of material used and the standard quantity of material
allowed for the goods produced during the period

material requisition form

a source document that indicates
the types and quantities of material to be placed into production
or used in performing a service; it causes materials
and its cost to be released from the Raw material Inventory
warehouse and sent to Work in Process Inventory

material mix variance

(actual mix X actual quantity X standard price) - (standard mix X actual quantity X standardprice);
it computes the monetary effect of substituting a nonstandard mix of material

materials requirements planning (MRP)

a computerbased information system that simulates the ordering and
scheduling of demand-dependent inventories; a simulation
of the parts fabrication and subassembly activities that are
required, in an appropriate time sequence, to meet a production
master schedule

material yield variance

(standard mix X actual quantity X standard price) - (standard mix X standard quantity X standard price);
it computes the difference between the
actual total quantity of input and the standard total quantity
allowed based on output and uses standard mix and
standard prices to determine variance

Bill of materials

An itemization of the parts and subassemblies required to create a
product, frequently including assumed scrap rates that will arise as part of the production
process.

Direct cost

A cost that can be clearly associated with specific activities or products.

Direct costing

A costing methodology that only assigns direct labor and material costs
to a product, and which does not include any allocated indirect costs (which are all
charged off to the current period).

Direct labor

Labor that is specifically incurred to create a product.

Director

A member of a company’s Board of directors.

Indirect cost

A cost that is not directly associated with a single activity or event. Such
costs are frequently clumped into an overhead pool and allocated to various activities,
based on an allocation method that has a perceived or actual linkage between
the indirect cost and the activity.

Indirect labor

The cost of any labor that supports the production process, but which is
not directly involved in the active conversion of materials into finished products.

Materiality

The proportional size of a financial misstatement. It can be construed as
the net impact on reported profits, or the percentage or dollar change in a specific
line item.

Material requirements planning (MRP)

A computer-driven production methodology
that manufactures products based on an initial demand forecast. It tends to result in
more inventory of all types than a just-in-time (JIT) production system.

Materials price variance

The difference between the actual and budgeted cost to
acquire materials, multiplied by the total number of units purchased.

Materials quantity variance

The difference between the actual and budgeted quantities
of material used in the production process, multiplied by the standard cost per
unit.

Raw materials inventory

The total cost of all component parts currently in stock that
have not yet been used in work-in-process or finished goods production.

Indirect Taxes

Taxes paid by consumers when they buy goods and services. A sales tax is an example.

Direct Deposit

The direct transfer of payroll funds from the company bank account
directly into that of the employee, avoiding the use of a paycheck.

Direct-Method Format

A format for the operating section of the cash-flow statement that reports actual cash receipts and cash disbursements from operating activities.

Direct-Response Advertising

Advertising designed to elicit sales to customers who can be
shown to have responded specifically to the advertising in the past. Such costs can be capitalized
when persuasive historical evidence permits formulation of a reliable estimate of the future revenue
that can be obtained from incremental advertising expenditures.

Indirect-Method Format

A format for the operating section of the cash-flow statement that
presents the derivation of cash flow provided by operating activities. The format starts with net
income and adjusts for all nonoperating items and all noncash expenses and changes in working capital accounts.

Materiality

A characterization of the magnitude of a financial statement item's effect on a
company's overall financial condition and performance. An item is material when its size is
likely to influence decisions of investors or creditors.

Advance material request

Very early orders for materials before the completion
of a product design, given the long lead times required to supply some items.

Bill of materials (BOM)

A listing of all parts and subassemblies required to produce one
unit of a finished product, including the required number of units of each part
and subassembly.

Breeder bill of materials

A bill of material that accounts for the generation and
cost implications of byproducts as a result of manufacturing the parent item.

Earmarked material

Inventory that has been physically marked as being for a
specific purpose.

Indented bill of material

A bill of material reporting format under which successively
lower levels of components are indented farther away from the left
margin.

Material requirements planning

A computerized system used to calculate material
requirements for a manufacturing operation.

Material review board

A company committee typically comprising members representing
multiple departments, which determines the disposition of inventory
items that will not be used in the normal manufacturing or distribution process.

Materials requisition

A document listing the quantities of specific parts to be withdrawn
from inventory.

Matrix bill of material

A bill of materials chart listing the bills for similar products,
which is useful for determining common components.

Modular bill of material

A bill of material format in which components and subassemblies
are clustered by product option, so one can more easily plan for the
assembly of finished goods with different configurations.

Multilevel bill of material

An itemization of all bill of material components, including
a nested categorization of all components used for subassemblies.

Nonconforming material

Any inventory item that does not match its original design
specifications within approved tolerance levels.

Offal material

The waste materials resulting from a production process.

Phantom bill of material

A bill of materials for a subassembly that is not normally
kept in stock, because it is used at once as part of a higher-level assembly or
finished product.

Raw material

Base-level items used by the manufacturing process to create either
subassemblies or finished goods.

Repair bill of material

A special bill itemizing changes needed to refurbish an
existing product.

Reprocessed material

material that has been reworked and returned to stock.

Reserved material

material that has been reserved for a specific purpose.

Single-level bill of material

A list of all components used in a parent item.

Summarized bill of materials

A bill of materials format showing the grand total
usage requirement for each component of a finished product.

direct deposit

A system where funds are electronically credited to your account by a financial institution or a payroll service. For example, you can arrange with your employer to have your pay cheques automatically deposited into your no fee bank account.

Interac® Direct Payment

Instead of paying with cash or a credit card, Interac direct Payment allows you to pay for your purchase with a debit card, such as your bank card. The amount of the purchase is electronically debited, or withdrawn, from your bank account (see debit card).
Here's how to pay for items using Interac direct Payment and your bank account:
1. Swipe your bank card (or debit card) through the point of sale (POS) terminal at the store's check-out
2. Enter your personal identification number (PIN), confirm the amount to be paid and indicate the account (chequing) from which the money is to be drawn.
3. The specified amount is then electronically debited from your account.

pre-authorized direct deposit

A system where funds are electronically credited to your account by a financial institution or a payroll service.

conversion cost

Refers to the sum of manufacturing direct labor and overhead
costs of products. The cost of raw materials used to make products
is not included in this concept. Generally speaking, this is a rough measure
of the value added by the manufacturing process.

overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.

actual cost system

a valuation method that uses actual direct
material, direct labor, and overhead charges in determining
the cost of Work in Process Inventory

standard cost card

a document that summarizes the direct
material, direct labor, and overhead standard quantities and
prices needed to complete one unit of product

Cost of goods sold

The accumulated total of all costs used to create a product or service,
which is then sold. These costs fall into the general sub-categories of direct
labor, materials, and overhead.

Factory overhead

All the costs incurred during the manufacturing process, minus the
costs of direct labor and materials.

Manufacturing resource planning (MRP II)

An expansion of the material requirements planning concept, with additional computer-based capabilities in the areas of
direct labor and machine capacity planning.

Product cost

The total of all costs assigned to a product, typically including direct
labor, materials (with normal spoilage included), and overhead.

Stockless purchasing

The purchase of material for direct delivery to the production
area, bypassing any warehouse storage.

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