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Direct material cost is the cost of the raw materials and components used to create a product. The materials must be easily identifiable with the resulting product (otherwise they are considered to be joint costs). The direct material cost is one of the few variable costs involved in the production process; as such, it is used in the derivation of throughput from production processes. Throughput is sales minus all totally variable expenses. Examples of direct materials are: 1  The timber used to construct a house. 2  The steel included in an automobile. 3  The circuit board included in a radio. 4  The fabric used to assemble clothing.
Step 1. Set up a standard costing system for direct materials. A business can initially assume or budget direct materials cost by implementing a standard costing system to estimate the expected purchase price and production usage of direct materials using the best information available.uppose that the business has set the standard direct materials cost at $20 per unit but actually purchases the materials later at $25 per unit for100 units for a total of $2,500.