Accounting. PRACTICE OF MANAGEMENT ACCOUNTING
Statements on Management Accounting
PRACTICE OF MANAGEMENT ACCOUNTING
TITLE
Definition and Measurement of Direct Material Cost
TABLE OF CONTENTS
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . Materiality . . . . . . . . . . . . . . . . . . . . . . . . . Material Quantities . . . . . . . . . . . . . . . . . . . Material Lost in the Production Process . . . . Samples, Prototypes, and Initial Production Runs . . . . . . . . . . . . . . . . . . 1 2 2 2 3 Unit Price of Direct Material . . . . . . . . . . . . . Use of Estimates . . . . . . . . . . . . . . . . . . . . Material-Related Costs . . . . . . . . . . . . . . . . Cost Systems . . . . . . . . . . . . . . . . . . . . . . . 3 3 4 4
CREDITS
The Institute of Management Accountants appreciates the contribution of Michael J. Sandretto, Price Waterhouse & Co., Columbus, Ohio, for his research and writing associated with this project.
Published by National Association of Accountants 10 Paragon Drive Montvale, NJ 07645 www.imanet.org
Copyright © 1986 in the United States of America by National Association of Accountants. All rights reserved ISBN 0-86641-146-1
PRACTICE OF MANAGEMENT ACCOUNTING
The term “direct material cost” as used in practice, in literature, and in litigation has a wide variety of meanings. Unless the intended meaning in a given context is clear, confusion and misunderstanding are likely to result. The purpose of this Statement is to provide a conceptual definition of “direct material cost” that, in the absence of a specified alternative, should be taken as the meaning of this term. This Statement makes the conceptual definition more concrete by describing how direct material costs should be measured. Measurement has two aspects: a. The quantity of material that is to be included as direct material; that is, the inputs that are to be counted. b. The unit price by which each of these quantities is multiplied to arrive at a monetary cost. Many of the examples used in
PRACTICE OF MANAGEMENT ACCOUNTING
TITLE
Definition and Measurement of Direct Material Cost
TABLE OF CONTENTS
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . Materiality . . . . . . . . . . . . . . . . . . . . . . . . . Material Quantities . . . . . . . . . . . . . . . . . . . Material Lost in the Production Process . . . . Samples, Prototypes, and Initial Production Runs . . . . . . . . . . . . . . . . . . 1 2 2 2 3 Unit Price of Direct Material . . . . . . . . . . . . . Use of Estimates . . . . . . . . . . . . . . . . . . . . Material-Related Costs . . . . . . . . . . . . . . . . Cost Systems . . . . . . . . . . . . . . . . . . . . . . . 3 3 4 4
CREDITS
The Institute of Management Accountants appreciates the contribution of Michael J. Sandretto, Price Waterhouse & Co., Columbus, Ohio, for his research and writing associated with this project.
Published by National Association of Accountants 10 Paragon Drive Montvale, NJ 07645 www.imanet.org
Copyright © 1986 in the United States of America by National Association of Accountants. All rights reserved ISBN 0-86641-146-1
PRACTICE OF MANAGEMENT ACCOUNTING
The term “direct material cost” as used in practice, in literature, and in litigation has a wide variety of meanings. Unless the intended meaning in a given context is clear, confusion and misunderstanding are likely to result. The purpose of this Statement is to provide a conceptual definition of “direct material cost” that, in the absence of a specified alternative, should be taken as the meaning of this term. This Statement makes the conceptual definition more concrete by describing how direct material costs should be measured. Measurement has two aspects: a. The quantity of material that is to be included as direct material; that is, the inputs that are to be counted. b. The unit price by which each of these quantities is multiplied to arrive at a monetary cost. Many of the examples used in