Accounting for Materials

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 costs 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.

• The finished product of a particular process forms the raw material of the succeeding process (e.g., the cost of yarn transferred from the spinning process to the 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).