Cost Accounting · Ch 2 — Material
Concept and Classification of Material
Concept and Classification of Material
Material is the most tangible and, in most manufacturing concerns, the single largest element of cost. It refers to the physical substances — raw materials, components, consumable stores, spare parts, packing materials and the like — that a business buys, holds, and consumes in the course of making its products or rendering its services. Because material often accounts for 50% or more of the total cost of a product, its purchase, storage, issue and control receive close and systematic attention in cost accounting. Odisha CHSE's Cost Accounting syllabus draws on the same cost-accounting principles of materials management taught across the wider Commerce stream, so the ideas learnt here carry over directly into every costing problem you will meet.
Material
Material means any commodity or substance — raw material, component, consumable store, spare part or packing material — that is purchased and held by a business for use in production or in rendering a service, and which forms part of the cost of the finished output.
Direct Material vs Indirect Material
The most important classification for costing purposes divides material into two kinds, according to whether its cost can be conveniently traced to a specific product, job or process.
Direct Material
Direct Material is material that becomes a physical, identifiable part of the finished product and whose cost can be conveniently and economically traced to a particular unit of output — for example, timber in furniture, cloth in a garment, or leather in shoes.
Indirect Material
Indirect Material is material that does not form an identifiable part of the finished product, or whose cost is too small to trace to a single unit, and is therefore treated as part of overheads — for example, lubricating oil for machines, cotton waste for cleaning, or nails and glue used in furniture.
| Basis | Direct Material | Indirect Material |
|---|---|---|
| Traceability | Conveniently traced to a specific product/job | Not conveniently traced; charged as overhead |
| Part of product | Becomes an identifiable part of the finished output | Does not form an identifiable part, or is too small to trace |
| Cost treatment | Charged directly as a Prime Cost item | Absorbed into factory/works overhead |
| Examples | Timber in furniture, cloth in a shirt | Glue, cotton waste, lubricating oil |
Other useful classifications of material
Besides the direct/indirect split, material is also grouped in several practical ways that help in storing and controlling it:
- Raw materials — the basic inputs that are converted into finished goods (e.g. iron ore, cotton, timber).
- Components and sub-assemblies — bought-out parts that are assembled into the finished product (e.g. a motor bought for a fan).
- Consumable stores — items consumed in the process but not forming part of the product (e.g. lubricants, cleaning material).
- Spare parts — items kept to repair and maintain plant and machinery.
- Packing materials — items used to pack the finished product for despatch (e.g. cartons, wrappers).
A sound classification is the first step in materials management: it decides which items need tight, individual control (typically costly direct materials) and which can be controlled loosely in bulk (typically cheap consumable stores).
Any commodity or substance — raw material, component, consumable store, spare part or packing material — purchased and held by a business for use in production, forming part of the cost of the output.
Material that becomes an identifiable part of the finished product and whose cost can be conveniently traced to a particular unit of output; charged as a Prime Cost item.
Material that does not form an identifiable part of the product, or is too small to trace to one unit, and is therefore absorbed into overheads.