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.

Direct 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).

Indirect Materials

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).

Frequently Asked Questions

What is a material cost?

Material Cost was defined by the institute of cost and management accountants as follows: “the cost of commodities supplied to an undertaking.”

What are examples of material costs?

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

What are the two types of materials?

Materials are either direct materials or indirect materials.

What are direct materials?

The characteristics of direct materials are the following: 1. Directly related to and identified with cost centers or cost units 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

What are indirect materials?

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 2. Used in such small quantities that it is not possible to ascertain their per-unit cost exactly

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