Material Cost

Written by True Tamplin, BSc, CEPF®

Updated on December 21, 2022

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).

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.