 Hello, in this lecture we will define direct materials costs. According to fundamental accounting principles, while the 22nd edition, the definition of direct materials cost is expenditures for direct material that are separately and readily traced through the production process to finished goods. When we're talking about direct materials costs, we're typically talking about a company that manufactures inventory and whether or not we can apply the direct materials to that process. The production of an inventory usually taking place in the form of a job cost system or a process cost system. For example, if we were making tablets such as this, and we would need to then apply the costs to that tablet and support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it in some type of way. Two ways to process the costs of inventory typically are a process cost system or a job cost system. Under either method, we would want to break the costs out into materials, labor and overhead. And whenever we think of inventory, we really want to think of them in those three categories, meaning that inventory, any inventory consists of more than just the direct materials, but the cost of that inventory is going to include the labor and the overhead. Our job then is to apply those costs to the specific unit of inventory, the specific batch or the specific process, depending on the system we are using. For example, the direct materials could include the metals involved here as well as the plastic that would be involved in this tablet. Those would be the things that are physically part of this end product and are also things that we can trace directly to that particular product or that particular process, depending on the type of system we are using. And then we have, of course, the labor and the labor is another area where we can apply that cost directly to the inventory or we can have some labor that is going to be indirect. Either way, of course, the labor is not physically part of the end product, the tablet in this case, but it is a substantial part of the value of the tablet and something that we want to include in the cost of the inventory. Things that are not directly applicable, we can't apply them to the job directly or we can't apply them to the process because we don't have any way to do that would be in the overhead. For example, if we're talking about depreciation on the factory or maintenance of the factory, basically anything that says factory in it, that we can't apply directly to the job, directly to a specific inventory or specific job or specific process, then we still want to include it in those specific jobs and processes. We just don't know how to allocate it to those specific jobs and processes. However, it is part of the end costs of those. Therefore, we're going to put it into overhead and then we will apply those out at a later time. Those will include the indirect materials. So we have materials that we can apply out directly versus materials that may be small that we're not going to apply out directly, such as in this case, glue or something like that would be directly involved in the product, but it's going to be indirect materials because it's small enough that we won't be able to track it directly to the specific item, the job, or process. Therefore, we'll put it into the overhead and then allocate it out using some format of estimate.