How to Calculate Direct Materials Cost

In order to make a profit, you need to know how much to charge for your products. In order to know how much to charge, you need to know how much it costs to make the product. The first step in determining a product cost is to calculate the direct material cost. These are the materials used in the assembly of the product. Materials are purchased from suppliers, made in-house or a combination of both.

Things You'll Need

  • Computer with spreadsheet software
  • Adding machine
  • Paper
  • Pencil
  • Complete list of material costs
  • Material/parts list (bill of materials for each product)

Instructions

    • 1

      Gather your parts or materials list for each product for which you will be calculating direct material cost. Gather your material cost list or supplier cost advice. If you have not created a material cost list for your company, you can look at current invoices from suppliers for components, parts and raw materials. If you have not created a bill of material for each product, you will use the blueprint for each product and make your bill of materials (BOM) in a spreadsheet.

    • 2

      Check your assembly lines, manufacturing areas, molding and stamping processes to confirm that the BOM or blueprint is correct. Because of kaizen (continuous process improvement), cost reduction or customer requests, materials used change sometimes. If possible, go to the area and confirm that all parts, components and materials listed on the BOM are still being used and that no new components have been added.

    • 3

      Create a BOM for each product on individual spreadsheets. In order to use macros for totals, it is imperative to be consistent in line and column usage for BOMs. Make the size of the BOMs consistent regardless of the number of materials used. Therefore, use your longest list of materials to establish the form you are creating. Include the part name and part number.

    • 4

      List all materials used in one column. In the next column, list the part number of each of the materials beside the name. In the third column, list the vendor or supplier of each material beside the part number. In the fourth column, list the quantity of the material used beside the vendor. In the fifth column, list the individual cost of each material used.

    • 5

      Insert a sum function towards the bottom of your BOM for total direct materials costs. This will not be the last line or the final total cost. Remember that you need to add in your overhead rate to get a more accurate reflection of total cost. Therefore, leave lines toward the bottom of the form for overhead rate and the total cost of the part. If materials or sub-assemblies are coming from another country, you may also need a line or column for exchange rate adjustments of price. You now know the direct materials cost of an individual product.

    • 6

      Multiply the individual direct material cost from each BOM you created times the order quantity for the period you are seeking actual direct material cost. If you set up all of your BOMs up on individual spreadsheets, utilizing the same fields (columns and lines) then you can create a macro to multiply the direct material cost for all products times order quantities.

    • 7

      Add together the direct material cost from your quantity spreadsheets. Again, if you are consistent on individual spreadsheets, utilizing the same fields (columns and lines), then you can create a macro to total the direct material cost.

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References

  • Photo Credit Frizzantine/iStock/Getty Images

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