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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.
Labor and direct materials, which are used in creating a specific product, constitute the majority of direct costs. For example, to create its product, an appliance maker requires steel, electronic components and other raw materials. Companies typically track the cost of the finished raw materials as a direct cost. Two popular ways of tracking these costs include last in, first out (LIFO) or first in, first out (FIFO). While salaries tend to be a fixed cost, direct costs are frequently variable.