Material costing
Material costing is the process of determining the total cost incurred in acquiring and using materials for production process. It includes the purchase price of raw materials, transportation costs, storage, handling, and wastage during the production process.
It directly influences price of a product and helps a company know how much it truly spends on the materials used to create its products.
Material costing forms a key component of overall cost accounting, helping businesses control costs, fix product prices, and maximize profits.
Key Components of Material Cost
To understand material costing properly, it’s important to break down what goes into the total material cost:
- Purchase Cost: The price paid to suppliers for raw materials.
- Transportation Cost: The expenses of bringing materials to the factory or site.
- Storage and Handling Costs: Costs associated with warehousing, maintaining, and handling materials.
- Insurance and Taxes: Any duties, insurance, or taxes paid on materials.
- Wastage or Scrap: Losses due to waste, damage, or defects during processing.
The total material cost is the sum of all these expenses, giving a clear picture of what the materials truly cost the business.
Importance of Material Cost
Material costing is a strategic tool for decision-making. Here’s why it matters:
1. Helps Set Competitive Prices: Knowing the exact cost of materials ensures fair and profitable pricing.
2. Improves Cost Control: Identifies wastage and inefficiencies in material usage.
3. Supports Budgeting: Helps forecast future material expenses accurately.
4. Assists in Profit Planning: Determines how material costs affect overall profitability.
5. Enhances Decision-Making: Informs make-or-buy decisions and supplier negotiations
Tips for Effective Material Costing
- Collect and record material expenditure and market price of raw material.
- Review market trends for price fluctuations.
- Implement waste control measures to minimize scrap cost and losses to increase profit margin.
- Compare actual expanses and raw material rate with cost considered during estimation on regular interval.
- Need to estimate accurate material cost. Low material estimation will reduce profit margin while high material estimation increases price of product.
- This provides basis to revise material cost of existing part as well as new product cost estimation
Type of Material Cost
Material costing is a strategic tool for decision-making. Here’s why it matters:
Material cost divided in two types:
1. Direct Material cost &
2. Indirect Material cost
Direct Material Cost:
A direct material is one which directly processed and converted into salable product and the amount paid for direct material in known as direct material cost.
Example: Mild steel Plate, Rod, Angle, Beam, Paint, Plastic sheet etc.
Indirect Material Cost:
An indirect material is one which directly not used in the product but necessary for the production process and the amount paid for indirect material in known as indirect material cost. Example: Cotton waste, Grease, oil, cutter, coolant, hand gloves etc.
Procedure to calculate Direct Material cost:
1. Prepare list (Bill of Material) of all parts.
2. Calculate weight of each part (Example: unit in kg).
3. Collect rate of raw material (Example: unit in Rs/kg).
4. Calculate cost of each part (in Rs.) by multiply (Weight*Rate*Qty.)
5. Calculate direct material cost by adding each cost.
Conclusion
Material costing is a vital part of every cost accounting system. It provides insight into how materials impact the total cost of production and overall profitability. By choosing the right costing method and maintaining accurate records, businesses can ensure better control over their material expenses — leading to efficient operations and sustainable growth.