Material cost is one of the cost elements that make up the total cost of a product. The cost elements are material, labor and burden costs. Material is the raw and purchased parts that make up a product. Do not confuse supplies as material. Supplies are items like gloves, hand tools, sandpaper, etc, that may be used in the production process, but are not part of the completed product.
When a business buys material or purchase parts, the purchasing department will create a purchase order to the supplier. The purchase order will state the cost of the material. It may also have additional information such as future years pricing, quantities required, etc.
What about packaging and shipping costs?
Any packaging and shipping costs should be considered to be part of the material cost. For example, if you purchase an item for $5, and it costs $.20 in packaging and shipping to get it to you, then the cost of the item is $5.20 For some items this cost can be substantial.
The bill of materials (BOM):
A bill of materials is wealth of information. It's a report that lists all the materials used in making a product, along with the production operations. It also has all the costs associated with building the product. By looking at a bill of materials, a person can tell what the ship part is, what material and purchased parts are used, the quantity used, the labor used, and the costs for all of these. The bill of materials will have all the cost elements of the product, which include, labor, material and burden costs.
The bill of materials is usually maintained by the materials or accounting department. The origination of the bill of materials begins with the engineering department. The Engineers will engineer the production processes and determine the materials used and also the product cycle time and labor needed.
With the high cost of raw materials such as steel, aluminum, etc. it is important to have a clear understanding of who gets the revenue from any scrap materials. Does the manufacturer get to keep it, the customer, or maybe event the supplier? Depending on the type of products manufactured, the scrap material revenue can be very substantial. This revenue is usually not included in a bill of material, but is often budgeted for as scrap revenue, and is a consideration when quoting new work.