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1. Name: - Kalpesh Chauhan [M.com., b.ed]
STD.:- T.Y.BBA/S.Y.B.COM.
Subject: - Cost Accounting
Chapter: - 1. Material Cost

2.  Introduction
 Material is the first and prime important element among the three cost
element i.e. Material, labour and overhead expenses. They are the basic
cost.
 All operations and activities of an industrial unit depends upon its
material.
 It means acquition of material at proper and right time, in proper and
sufficient quantity with possessing proper quality and maintenance of it
by issuing material to production department according to requirement.
All these total process is known as Material Management.
 According to an estimation Material Management is contributed nearly
66% shares in production management.
 Thus through material management an effective material control is very
essential in industry.

3.  Meaning of Materials
During the production process, material on
which the processes are applied by using labour
and other required expenses to change its
original form for making finished goods or
products are known as materials, ratherly known
as raw materials. According to the application of
material there are two types of material i.e.
(1) Direct Materials and (2) Indirect Materials.

4.  Types of Materials
 (1) Raw Materials
 (2) Work – In – Progress (W.I.P)
 (3) Partly or Semi-finished materials
 (4) Finished Material (Products)
 (5) Loose parts, components or internal
part components
 (6) Miscellaneous or Sundry Materials
 (7) Defective Materials
 (8) Waste
 (9)Scrap
 a) Legitimate Scrap
 b) Administrative Scrap
 c) Defective Scrap

5.  Different Stock Levels Formulas
 (1) Re-Ordering Levels:
Ordering level = Maximum consumption x Maximum time required to get
material.
 (2) Minimum Level:
Minimum Stock Level = Re-ordering level – (Normal consumption x Normal re-
ordering period
 (3) Maximum Level:
Maximum Stock Level = Re-ordering level + Re-ordering quantity – (Minimum
Consumption x Minimum Re-ordering period)

6.  (4) Danger Level:
Danger Level = Average consumption x Maximum re – order
period for emergency purchase
 (5) Average stock level:
Average stock level = Minimum stock level +1/2 of re-order
quantity.
OR
Average stock level = maximum stock + Minimum stock
2

7.  (6) Safety stock = (Maximum usage (Maximum time – Average Time)

8. (7) Economic Ordering Quantity
Carrying cost: - it is the cost of holding the material in the
store. = S
Ordering cost: - it is the cost of placing order for the purchase
of material = O
 EOQ=
2𝐴𝑂
𝐶𝑆
 A = Annual consumption (units)
 C = Cost per unit

9.  (8) No. of orders = Total consumption in unit
EOQ
 (9) Inventory Turnover Ratio = Cost of goods sold
Average stock
 (10) Average inventory = Op. Stock + Cl. Stock
2
 (11) Inventory Turnover Period
(in days) = No. of days in a year (365)
Inventory turnover ratio
 (12) Duration between two orders = No. of days in a year (365)
No. of order placed