What are the different types of material costs?

The different types of material costs include raw materials, components and sub-assemblies, hardware, inventory parts and supplies, packaging and labeling materials, shipping costs, and taxes related to these items.

How is material cost calculated?

Material cost is typically calculated by multiplying the unit price for each type of material used in a product or project by the quantity required for its completion.

What is included in a material cost estimate?

A material cost estimate should include all necessary components required to complete the job such as raw materials, components and sub-assemblies, hardware, inventory parts and supplies, packaging and labeling materials, shipping costs, taxes, and any additional fees associated with the project.

How does material cost affect profit margin?

Material cost is an important factor in determining a company’s profit margin as it directly affects the total cost of production. Therefore, reducing material costs can often result in increased profits for the business.

What strategies can be used to control material costs?

Strategies used to control material costs include negotiating better prices with suppliers, using lean manufacturing principles to reduce waste and optimize processes, and implementing Just-In-Time inventory systems to reduce excess inventory carrying costs. Additionally, companies should also look into recycling or reusing materials whenever possible.

What Is Material Cost? | Definition, Explanation and Examples

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:

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).

Purchased for a particular job, work order, or contract.

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:

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.

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).

Material Cost FAQs