How to Compute Direct Materials Put into Production
Although some purchased direct materials are put into production, some are stored for future use. Therefore, the amount of direct materials purchased is probably different from the amount of direct materials actually put into production.
Your simple outputs formula helps explain this relationship:
In this case, Beginning equals beginning inventory on the first day of the time period. Inputs refers to purchases or transfers from other parts of the company. Ending is ending inventory at the end of the last day of the time period.
Finally, the Outputs value indicates what completed the production process — the stuff that’s ready for the next stage of production (or for sale to customers). You can apply this formula to the quantity of units in inventory and put into production, and also to the costs of those same units.
For example, suppose that a convenience store started the year with ten cans of coffee. During the year, it bought another 200 cans of coffee. At the end of the year, it counted seven cans of coffee in stock. How many cans did the store sell?
You can think of direct material storage in the same way: A factory keeps direct materials (or cans of coffee) on hand so that they’re ready to be put into production (or be sold to customers).
Units of direct materials put into production
For direct materials, you can use the outputs formula; just set your Beginning value as the number of units of beginning inventory, Inputs as the number of new units purchased, Ending as the number of units of ending inventory, and Outputs as the number of units put into production.
Suppose your factory makes chocolate milk. You started with 500 gallons of chocolate syrup and then purchased another 2,000 gallons during the year. At the end of the year, you counted 400 gallons of chocolate syrup in stock. This formula computes the number of gallons of chocolate syrup put into production:
During the year, 2,100 gallons were moved out of storage and put into production (to blend chocolate milk).
Cost of direct materials put into production
Naturally, factories need to keep track of both the quantity and the total costs of different items at each stage of the production process. To figure out total costs, you can apply the outputs formula to the total cost of direct materials.
Suppose that your chocolate milk factory pays $2 for each gallon of chocolate syrup. To compute the cost of direct materials put into production, just multiply the quantities for Beginning, Inputs, and Ending by the $2 cost per unit:
Your calculation reveals that you put 2,100 gallons into production, for a total cost of $4,200.
You have to do similar computations for every type of direct material needed to make products. For example, you also need to compute the milk input for your chocolate milk factory.