MATERIAL

COST

Prepared By
Revathi
Material Cost
Material cost refers to the  cost of materials used to
manufacture a product or provide a service.

It is known as direct material cost and raw material cost.

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 Definition
o Material cost constitutes to a major proportion of
total cost of the product. Since all products are
made up of many materials, accurate determination
of material cost by direct material cost or indirect
material is essential.
o Whenever a product/component is manufactured out of a material some portion of it goes as
waste/scrap in the form of chips or risers etc. In addition to this some components/parts may
not meet the final specifications essentially needed such as surface finish, dimensions and
surface hardness etc. and are therefore rejected in the final inspection process, thus leading to
scrap.
2 MM.DD.20XX
 Thus the material cost chargeable to a
component is that in the pre-
manufacturing or rough state (i.e., raw
material) and includes all scrap removed
during the process of manufacturing.

Mensuration is used to calculate area

and volume of the component/parts or
products.

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 (A) Direct Materials
Types of Materials
(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.,
(B) In-direct Materials
cotton used for spinning cotton yarn, cotton yarn used in
weaving cotton textile, wood used in making furniture, (I) Materials which cannot be allocated but can be
the leather used in making shoes and bricks and cement apportioned to or absorbed by cost centers or cost units
used in construction buildings. e.g., cotton waste for cleaning the machinery,
lubricants for oiling the machinery, diesel oil for
(II) Materials which are purchased specifically for a generating power etc.
particular job, work order or contract.

(III) Finished product of a particular process which (II) Materials which are used in such a small quantity
forms the raw material of the succeeding process that it is not possible to ascertain their per unit cost
exactly e.g., cost of thread and nails used in shoe-
e.g., cost of yarn transferred from the spinning
making.
process to weaving process.
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 Question 1
1) a) From the following data for the last 7 days, compute the Average Stock Level for a
component:
Maximum Usage in a Week 600
Minimum Usage in a Week 400
Average Usage in a Week 450

Time-lag procurement of materials: Maximum 4 days. Minimum 2 days. Re-order

quantity = 1,500 units.

(b) You also ascertain the Danger Stock Level from the above information.
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 ANSWER

(a) Average Stock Level = Minimum Level * + ½ (Re-order quantity)

= 1.050 units + ½ × 1,500 units = 1,800 units

(b) Danger Stock Level = Average usage x Minimum Re-order Period

= 450 units × 2 = 900 units

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 Question II
Compute the re-order level, minimum level, maximum level, average stock level for
components A and B based on the following data:
A B
Maximum Consumption Per Week 150 150
Average Consumption Per Week 100 100
Minimum Consumption Per Week 50 50
Re-Order Period 8 to 12 Weeks 4 to 8 Weeks
Re-Order Quality 400 Units 600 Units

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 ANSWER

A B
1. Re-order Level = Maximum Consumption x Maximum 150 x12 = 150 x 8 =
re-order Period 1,800 Units 1,200 Units
2. Minimum Level = Re-order point – Average 1800-(100x10) = 1200-(100x6)=
Consumption x Average Re-Order Period 800 Units 600 Units
3. Maximum Level= Re-order point – (Minimum 1800-(50x80)+400= 1200-(50x4)+60
Consumption x Minimum Re-order Period)+ Re-order 1,800 Units =
Quantity 1,600 Units
4. Average Level = Maximum Level+ Minimum Level/ 2 1800+800/2 = 600+1600/2 =
1,300 Units 1,100 Units

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THANK YOU!