Accountants Material Cost Formula
Learn how to calculate direct materials used, net purchases, materials available, and average material cost per unit.
This formula estimates the direct cost of raw materials charged to production during a reporting period. It reconciles opening stock, purchases, inbound delivery costs, returns, discounts, and closing stock so that materials still on hand are not treated as used.
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Direct Materials Used
Where:
Start with materials on hand at the beginning, add adjusted purchases and directly attributable inbound delivery costs, then deduct materials remaining at the end.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| openingMaterials - Opening materials inventory | Value of raw materials on hand at the start of the reporting period. | currency |
| materialsPurchases - Materials purchases | Gross cost of raw materials purchased during the period before returns and discounts. | currency |
| purchaseReturns - Purchase returns | Value of materials returned to suppliers during the period. | currency |
| purchaseDiscounts - Purchase discounts | Supplier discounts that reduce the purchase cost of materials. | currency |
| deliveryCosts - Delivery and freight costs | Inbound costs directly attributable to obtaining the materials. | currency |
| closingMaterials - Closing materials inventory | Value of raw materials still on hand at the end of the reporting period. | currency |
| unitsProduced - Units produced | Completed units produced during the period. | number |
Step-by-Step Calculation
Calculate net materials purchases
Reduce gross purchases by returns and supplier discounts.
netMaterialsPurchases = materialsPurchases - purchaseReturns - purchaseDiscounts
Calculate materials available for use
Combine opening inventory, adjusted purchases, and attributable inbound delivery costs.
materialsAvailable = openingMaterials + netMaterialsPurchases + deliveryCosts
Calculate direct materials used
Deduct the cost of materials still held at period end.
materialsUsed = materialsAvailable - closingMaterials
Calculate average material cost per unit
Divide materials used by completed output to estimate the average material cost per unit.
materialCostPerUnit = materialsUsed / unitsProduced
Calculate inventory change
A positive amount means closing inventory is higher than opening inventory.
inventoryChange = closingMaterials - openingMaterials
Monthly direct material cost example
Net purchases
$25,000 - $500 - $300
$24,200
Materials available for use
$5,000 + $24,200 + $1,200
$30,400
Direct materials used
$30,400 - $6,200
$24,200
Material cost per unit
$24,200 / 1,000
$24.20 per unit
Inventory change
$6,200 - $5,000
$1,200 increase
Final Result
Estimated direct materials used: $24,200, or $24.20 per completed unit.
Assumptions
- ✓All amounts use the same currency and cover the same reporting period.
- ✓Opening and closing inventories are measured using a consistent valuation method.
- ✓Delivery costs are inbound costs directly related to obtaining materials.
- ✓Completed units are an appropriate basis for calculating an average material cost per unit.
Limitations
- !The calculation does not include direct labour, manufacturing overhead, selling costs, tax, or financing costs.
- !An average cost per unit can hide differences between products, batches, or jobs.
- !Inventory count errors, write-downs, wastage, and transfers can cause actual records to differ from the estimate.
- !Appropriate inventory valuation and cost allocation policies may vary by business and reporting requirements.
Common Mistakes to Avoid
Using outbound delivery to customers as an inbound material acquisition cost.
Forgetting to deduct supplier returns or purchase discounts from gross purchases.
Deducting opening inventory instead of adding it.
Entering opening and closing inventory values calculated using inconsistent valuation methods.
Dividing by units sold rather than completed units produced.
Treating the result as total product cost when it only covers direct materials.
Related Formulas
Frequently Asked Questions
What is the formula for direct materials used?
Direct materials used equals opening materials inventory plus net materials purchases plus inbound delivery costs, less closing materials inventory.
How are net materials purchases calculated?
Net materials purchases equal gross materials purchases less purchase returns and purchase discounts.
Why is closing material inventory deducted?
It represents materials still held at the end of the period, so it has not been charged to that period's production.
Is freight included in direct material cost?
Inbound freight or delivery that is directly attributable to obtaining materials can be included in this estimate. Outbound customer delivery is usually considered separately.
What does material cost per unit mean?
It is average direct materials used divided by completed units produced; it does not include labour or overhead.
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