Material Cost Types of material cost

Material Cost Important topics are covered and types of material cost

Before diving into our post let’s understand the essence of material cost it’s the money spent on the necessary ingredients or supplies to create something remarkable.

What is material cost?

Material cost is how much money it takes to get the stuff you need to make something. This includes the cost of raw materials like wood or steel and any other things you use to create a product. If you’re trying to manage your costs, it’s important to monitor how much you spend on these materials. This helps businesses make sure they’re not spending too much money and can stay competitive.

Key points about material cost

1. Raw materials:
   • Includes the cost of basic materials used in manufacturing. For example, in the construction industry, the cost of materials may include the cost of wood, steel, cement, etc.
2. Components:
   • In manufacturing, products are often made from different components. The cost of these items, whether purchased from suppliers or produced in-house, determines the cost of supplies.
3. Direct labor:
   • Although direct labor is a separate cost group, it is worth noting that product costs are separate from labor costs. Product costs are associated with readily available materials, while direct labor costs include payment for human effort directly associated with the production process.
4. Variable Costs:
   • Product costs are often considered variable costs, meaning they vary directly with the volume of the product or service. As production increases or decreases, so does the cost of supplies.
5. Tracking and Control:
   • Effective tracking and control of material costs is important for companies to control costs and improve production processes. This includes monitoring inventory levels, negotiating recommendations with suppliers, and finding cost-saving opportunities.

Example of material cost

If you spend 10 Indian Rupees on flour, sugar, and eggs to make one cake, then 10 Indian Rupees is the material cost for that cake.

Material cost variance

Material cost variance is like looking at the difference between how much money you planned to spend on materials and how much you actually spent.

If you thought making a cake would cost you 50 rupees based on your plan, but you ended up spending 60 rupees, the material cost variance would be 10 rupees more than expected. It helps you see if you’re staying on budget or if there are unexpected costs in getting the materials you need.

Cost of material consumed

Cost of materials” is the total amount of money you spend on the materials you use or use to make something.

For example, if you use 100 rupees worth of ingredients to bake some cakes, the cost of the food will be 100 rupees. It’s like adding up the money you spend for all the materials needed to make your final product.

Material cost variance formula

Material Cost Variance = (Actual Cost of Materials Used) – (Planned Cost of Materials)

Simple terms

1. Actual Cost of Materials Used
   • This is how much money you actually spent on the materials.
2. Planned Cost of Materials
   • This is how much money you had originally planned or budgeted to spend on the materials.
3. Material Cost Variance
   • The difference between what you planned to spend and what you actually spent on materials.

Example

imagine you planned to spend 50 rupees on ingredients to bake a cake, but you actually spent 60 rupees. Here’s how you calculate the material cost variance:

Material Cost Variance = Actual Cost of Materials Used – Planned Cost of Materials Material Cost Variance = 60 rupees (Actual) – 50 rupees (Planned) Material Cost Variance = 10 rupees

Types of Material Cost

1. Direct product cost
   • This is the amount of information that can be directly linked to the processing of specific products. For example, if you are baking a cake, the cost of flour, sugar, and eggs will be the cost of the items you will pay directly.
2. Indirect product costs
   • This is the amount of information that is not directly related to a specific product but still affects the entire production process. For example, the cost of washing equipment in a restaurant may be an indirect cost of goods.

Cost of material consumed formula

Cost of Material Consumed = Opening Inventory of Materials + Purchases – Closing Inventory of Materials

1. Opening Inventory of Materials:
   • The value of materials you had in stock at the beginning.
2. Purchases:
   • The amount of money spent on buying new materials during a certain period.
3. Closing Inventory of Materials:
   • The value of materials remaining in stock at the end.
4. Cost of Material Consumed:
   • The total value of materials used or consumed in the production process.

Example 1

1. Opening Inventory of Materials:
   • You start with 5 loaves of bread from the previous day.
2. Purchases:
   • You buy 10 more loaves of bread.
3. Closing Inventory of Materials:
   • At the end of the day, you have 3 loaves of bread left.

using formula

Cost of Material Consumed = Opening Inventory + Purchases – Closing Inventory

Cost of Material Consumed = 5 (Opening Inventory) + 10 (Purchases) – 3 (Closing Inventory) = 12 loaves of bread.

So, the cost of material consumed in making sandwiches for the day is 12 loaves of bread

Example 2

1. Opening Inventory of Materials:
   • You start with 20 lemons.
2. Purchases:
   • You buy 30 more lemons.
3. Closing Inventory of Materials:
   • At the end of the day, you have 10 lemons left.

using formula

Cost of Material Consumed = Opening Inventory + Purchases – Closing Inventory

Cost of Material Consumed = 20 (Opening Inventory) + 30 (Purchases) – 10 (Closing Inventory) = 40 lemons.

So, the cost of material consumed in making lemonade for the day is 40 lemons.

Q and A

Question:1 What do you mean by material cost?

Answer: The cost of goods is how much money you spend on the materials needed to make something. It includes the cost of all the raw materials or ingredients you use to make something. For example, if you’re making a cake, ingredient costs are what you spend on things like flour, sugar, and eggs. Simply put, this is the total cost of all the materials used to make something.

Question:2 What are examples of material costs

Answer:

1. Baking a Cake:
   • If you want to bake a cake, the flour, sugar, eggs, and butter are the materials. The cost of buying these ingredients is the material cost.
2. Building a Birdhouse:
   • If you’re making a birdhouse, the wood, nails, and paint you use are materials. The money spent on these items is the material cost.
3. Selling Lemonade:
   • For a lemonade stand, the lemons, sugar, and cups are the materials. The cost of getting these things is the material cost

Question:3 How do you calculate material cost?

Answer:

Make a list of ingredients:

First, make a list of all the ingredients you will need to make your product. For example, if you are making a cake, add flour, sugar, eggs, and so on.
Here is the price:

Then write down how much each item on your list costs. You can find the price by checking in-store or online.
Add the costs:

Now add all the prices you wrote down. This will give you the total material cost to manufacture your product.

Example

Let’s say flour costs 20 rupees, sugar costs 10 rupees, and eggs cost 15 rupees. Adding them up: 20 + 10 + 15 = 45 rupees. So, the material cost for making your cake is 45 rupees.

Question:4 What are the 4 types of cost?

Answer :

1. fixed cost
2. variable cost
3. direct cost
4. indirect cost

Question:5 What is material cost in balance sheet?

Answer:

In the balance sheet, the cost of the equipment is usually not presented as a separate line item. Instead, it usually includes a “Cost of Goods Sold” (COGS) section, which represents the direct costs associated with manufacturing a product or providing a service.

Material costs, along with other direct costs such as labor and manufacturing costs, make up the total cost of goods sold. All these amounts are subtracted from the income from the sale of goods or services to calculate gross income.

1. Revenue: This is the money earned from selling goods or services.
2. Cost of Goods Sold (COGS): This includes all the direct costs associated with producing those goods or delivering those services, including material costs.
3. Gross Profit: Gross profit is calculated by subtracting the COGS from the revenue

Conclusion

Material cost is the money spent on stuff to make something. It includes the price of all the raw materials used. It’s like adding up the cost of ingredients for baking a cake.