Materials: The Most Important Element of Cost (2024)

Introduction:

Material is the first and most important element of cost. In most of the manufacturing organisations, materials form the single largest component of cost. The term material simply means any commodity or substance which is processed in a factory in order to be converted into finished product.

Materials may be classified as follows:

Raw Materials:

These are the basic materials supplied in crude form to be used for production, e.g., jute, cotton, steel, timber, rubber, coal etc.

Components:

These are not raw in nature rather are finished parts made out of raw materials which are assembled to make the finished product, e.g., types and tubes in cycle industry, stabilisers in A.C. and fridge manufacturing, batteries in car manufacturing, monitors in computer manufacturing, etc.

Tools:

These are the appliances used in the manufacturing operations, e.g., hammers, screw-drivers, drills, milling cutters, etc.

Spare Parts:

These are used for the maintenance of plant, machinery and buildings and for smooth running of f reduction schedule.

Consumable Stores:

These are the items used for smooth running of the machines, e.g., lubricants, oil, cotton waste, rags, brooms, etc.

Materials include both direct and indirect materials. Direct and indirect materials are both treated as stores items, whereas stock of finished goods is not treated as a stores item. Direct and indirect materials purchased for stock purposes to be issued to different jobs, work orders or departments as and when required are known as stores.

On the other hand, finished goods are treated as stock. We may also refer to the commonly used term ‘inventory’ which includes the stock not only of raw materials but also stores and spares, work-in-progress and finished goods. Thus, stock of materials is only a part of the inventory held by a manufacturing unit.

Materials which form part of a finished product are known as direct materials. In other words, direct materials can be conveniently and accurately allocated to a particular unit of cost. For example, leather used in the making of a pair of shoes and yarn required for a meter of cloth, are direct materials.

Indirect material, on the other hand, cannot be treated as part of the finished product because it cannot be conveniently and accurately allocated to a particular unit of product. Examples of such materials can be nails used in the making of shoes, cotton waste and lubricating oil required for the maintenance of machines, buttons and threads used in a suit etc.

To sum up, materials include physical commodities used to manufacture the final end product. It is the starting point from which the first operations start.

Out of all the factors of production, material is the most flexible and controllable input. Material has two unique features:

First, it is inventoriable and does not get waste and exhaust (unless it is deteriorated) with the passage of time as labour is wasted with the passage of time whether in use or not.

Second, material can be purchased in varying quantities according to the requirements of the firm whereas other elements of cost like labour and other services cannot be easily varied once they are established. That is why cost and management experts put in lots of efforts to control material cost.

Materials account for nearly 60 per cent of the cost of production as is clear from an analysis of the financial statements of a large number of private and public sector organisations.

The information on the average materials expenditure for different manufacturing industries is as follows:

According to the Indian Association of Materials Management, 64 paise in a rupee are spent on materials by Indian industries, 16 paise on labour and the rest of one rupee of cost is spent on overheads. Thus, the importance of material control lies in the fact that any saving made in the cost of materials will go a long way in reducing the cost of production and improving the profitability of a concern. Studies by experts in this field have highlighted the fact that if an organisation can affect 5% saving in material cost, it would be as good as increasing the production or sales by about 36%.

Proper control of materials is necessary from the time orders for purchase of materials are placed with suppliers until they have been consumed. The object of material control is to attack material cost on all fronts so that cost of material may be reduced. In other words, efforts are to be made to reduce the cost of material when it is purchased, stored and used.