Material Cost

What is ‘Material’? The material here means all kinds of materials which are used to produce a product or service. The material may be the basic raw material and all other materials such as components, fuel, lubricants, packing material, other consumables etc. Normally, the direct material is confused with materials but material includes both direct and indirect materials.

Now what is the material cost? Material cost means the cost of acquiring the material. It clarifies one thing that material cost does not only mean the cost of purchasing the material from the supplier. On the contrary, material cost includes all expenses which are directly attributed to the acquisition of any material.

For example, 1000 Kgs of iron scrap is purchased at the rate of $0.5 per kg and freight cost of bringing the material to the factory is $10. The material cost is $510 ($1000*$0.5 + $10). So, all relevant costs and benefits are taken into consideration in finding out material costs such as inward freight, insurance, taxes etc. and benefits such as duty drawback, refunds available on material cost, and any receipts from the sale of scrap generated from the material etc.

Labor Cost

What is labor? The labor here means all the human efforts whether physical or mental put to use for creation of a product or service. The labor does not only mean the direct labor working in the factory but it includes all the employees of the company in all departments. It includes all the permanent employees, temporary and contractual workers etc or any other source of physical or mental labor for which the company pays for.

Now, what is labor cost? Labor cost means all the payment made by the company towards acquiring services of the labor as defined above. It means the salary and wages paid to the employee or wage earners along with all the fringe benefits such as provident fund contribution, gratuity, incentive, bonus etc. provided to the employees.


Expense is a balancing category which contains all the expenses other than material and labor. These may include utility cost, an expense for material sent for job work from outside, audit expenses, depreciation etc. 

Last updated on : July 4th, 2017
What’s your view on this? Share it in comments below.

About The Author

Sanjay Bulaki Borad
Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

Leave a Reply

Marginal Cost
  • Absorption vs Variable Costing
    Absorption vs Variable Costing
  • Relationship of Direct & Indirect Costs with Fixed & Variable Costs
    Relationship of Direct & Indirect Costs with …
  • Inventoriable and Period Costs
    Inventoriable and Period Costs
  • Classification of Costs based on Functions / Activities
    Classification of Costs based on Functions / …
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook

    Related pages

    what is the purpose of double entry bookkeepingpure conglomerate mergergdr and adrrestrictive debt covenantscalculating profitability indexcostdriversfinance lease receivablesmoney market hedge advantages disadvantagesbank loan covenantsbank meaning in kannadawhat are the advantages of budgetingbook debt to equity ratiocomputing payback periodtypes of capital budgeting decisionsdividend policy determinantswhat is invoice financinggurpreet mannadvantage and disadvantage of payback period methodweighted average cost calculatorbudgeting managerial accountingirr method of capital budgetingoverdraft chequean example of a variable expense isadvantages of bank overdrafttrade payables payment periodinventory turnover ratio meaningtotal debt to total capital ratioexamples of capital employedweighted cost of capital calculatorprimary goal of managerial accountingcalculating pre tax cost of debthow to calculate debtors turnover ratioadvantages of cash flow statementdebentures definegaap r&dissue of debentures as collateral securityimpairment loss ifrsliquidity ratio meaningdscr calculationbullet maturitythe meaning of debenturefactors of macro environmentwhat is indenture of mortgagereasons for material price varianceadvantages and disadvantages of shareholdersequity growth rate formuladebit the receiver and credit the giverreceivable turnover days formulastockholder vs shareholderhow to calculate days receivablelimitations of marginal costingimportance of capital budgeting pdfcoverage ratios formulaadvantages of conglomerate mergernet asset turnover ratio analysisoperating profit before interest and taxdebentures examplepvifved inventoryreceivable turnover definitionlading meaningwhat are debentures and bondsmultiple irrsstockholders equity calculatorifrs vs gaap leaseshedging strategy definitionformula for diluted epsdiscounted profitability index dpisecured debenture definitionnon marketable financial assetdisadvantages of retained profitsharemarketschooldefine miscellaneous expensesratio analysis on financial statements