Material Cost: Definition
Material is the most important element of cost. In most manufacturing organizations, 50% to 70% of the total cost of a product is represented by the cost of the material.
Material cost was defined by the Institute of Cost and Management Accountants as follows: “the cost of commodities supplied to an undertaking.”
Examples of material cost include:
- Cost of cotton or cotton yarn for a textile mill
- Cost of cotton cloth for a hosiery factory
- Cost of wood, other raw materials, and factory supplies for a furniture manufacturer
Types of Materials
Materials are either direct materials or indirect materials.
The characteristics of direct materials are the following:
1. Directly related to and identified with cost centers or cost units. In other words, these are the items that form part of the product itself (e.g., cotton used for spinning cotton yarn, wood used in making furniture, or leather used in shoe-making).
2. Purchased for a particular job, work order, or contract.
3. Finished product of a particular process that forms the raw material of the succeeding process (e.g., cost of yarn transferred from the spinning process to weaving process).
The characteristics of indirect materials are the following:
1. Cannot be allocated but can be apportioned to (or absorbed by) cost centers or cost units. Examples include cotton waste to clean machinery, lubricants for oiling machinery, and diesel oil to generate power.
2. Used in such small quantities that it is not possible to ascertain their per-unit cost exactly (e.g., the cost of thread and nails used in shoe-making).
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.