Material is the most important element of cost. In most of the manufacturing concerns, 50% to 70% of the total cost of a product is represented by the cost of the material. The material cost has been defined by the Institute of Cost and Management Accountants, U.K., as “the cost of commodities supplied to an undertaking.” Cost of cotton or cost of cotton yarn in case of textile mill, cost of cotton cloth in case of hosiery factory, cost of wood in case of furniture includes raw materials, factory supplies and consumable stores, spare parts components and packing material.
Types of Materials
Material may be direct materials or indirect materials. Direct materials comprise:
(i) Materials which can be directly related to and identified with cost centers or cost units. In other words, these are the items which form part of the product itself, e.g., cotton used for spinning cotton yarn, cotton yarn used in weaving cotton textile, wood used in making furniture, the leather used in making shoes and bricks and cement used in construction buildings.
(ii) Materials which are purchased specifically for a particular job, work order or contract.
(iii) Finished product of a particular process which forms the raw material of the succeeding process e.g., cost of yarn transferred from the spinning process to weaving process.
Indirect materials comprise:
(i) Materials which cannot be allocated but can be apportioned to or absorbed by cost centers or cost units e.g., cotton waste for cleaning the machinery, lubricants for oiling the machinery, diesel oil for generating power etc.
(ii) Materials which are used in such a small quantity that it is not possible to ascertain their per unit cost exactly e.g., cost of thread and nails used in shoe-making.