Material Cost

Definition; Material cost is the monetary value of consumed raw materials in production process. The cost incurred may be through purchase of the raw materials or cost of extracting the raw materials from their natural state. The rate of cost per unit of raw materials used depend on the nature of the materials used in production.

NB1: To determine the cost of raw materials used, the right Key Measurement Indicator need to be used

Example one

Product: Banana chips; produced in terms of 50g packets

Requirements: 50g of banana pieces       @ $1.5 per gram, material cost turns out to be $1.5 to produce a 50g packet of banana chips

 

Example two

Product: Shirt; produced in terms of one unit of shirt

Requirements: 11/2 meters @ $2.0/meter, material cost turns out to be $3.0 to make one shirt

Conclusion; You can see different material unit measure is used for different products. This means that the entrepreneur need to identify the best measurement indicator so as to avoid wrong estimations of cost thereof.