Material Costing
Material costing is the process of determining and documenting the costs associated with the materials used in a production process or in the provision of services. This includes the costs of direct materials, those that become an integral part of the final product (like steel in a car), and indirect materials, those that are used in the production process but don’t become part of the final product (like lubricants for machines).
The steps of material costing typically include:
- Identifying the Materials Required: This includes the types and quantities of materials required for the production of each unit of a product or service.
- Calculating the Cost of Materials: This includes the purchase price of the materials, as well as any costs associated with shipping, handling, storing, and any taxes or tariffs on the materials.
- Accounting for Waste and Shrinkage: Some materials may be wasted or lost during the production process, and this must be factored into the cost.
- Allocating Indirect Material Costs : These are the costs of materials that are used in the production process but don’t become part of the final product. Allocating these costs across all units of a product can be complex, but it’s important for accurately capturing the total cost of production.
The outcome of the material costing process is an accurate calculation of the total material cost for each unit of a product or service. This information can be used in setting prices, evaluating profitability, making production decisions, and more.
It’s important to note that the precision and reliability of material costing can greatly affect the accuracy of a company’s financial statements and the decisions made based on those statements. As such, material costing is a key concern in fields like cost accounting and managerial accounting.
Example of Material Costing
let’s consider an example using a company that manufactures bicycles. We will focus on the direct material costs.
First, the company needs to identify all the materials that are directly used in the production of a bicycle. This could include:
- Frame: aluminum, steel, or carbon fiber
- Tires: rubber
- Gears, chains, brakes, and pedals: various metals
- Seat: leather or synthetic materials
- Handlebars: rubber for grip
Next, the company needs to determine the cost of these materials for each bicycle. Suppose these costs are as follows:
- Frame: $100
- Tires: $20 ($10 per tire)
- Gears, chains, brakes, and pedals: $80
- Seat: $30
- Handlebars: $10
Adding these up, the direct material cost for each bicycle is $240.
However, the company must also account for waste and shrinkage. For instance, if there’s a 5% rate of material waste due to the manufacturing process, that would add $12 (5% of $240) to the material cost of each bicycle, making it $252.
In addition, the company needs to consider indirect material costs, such as the oil for maintaining machines, cleaning supplies for the manufacturing facility, etc. Suppose these indirect costs total to $5000 a month, and the company produces 500 bicycles in a month. This would add an additional $10 ($5000/500 bicycles) of indirect material cost to each bicycle, bringing the total material cost to $262.
This calculation provides a more accurate understanding of the true cost of the materials that go into each bicycle, helping the company make informed decisions about pricing, profitability, and manufacturing efficiency.
