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Mar 14 2013

Material costs definition, classification and planning

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     Some raw materials required for the manufacture of any product. Electricity, fuel and other material costs are also needed for production. Material costs constitute a considerable share in the total cost of production and their planning is an important task in the business planning process. Procedure and features of planning of material costs we will consider today.

Material costs definition:

Material costs are the costs of acquiring of material resources necessary for business.

All material costs can be divided into the following groups (types):

  1. Raw materials and semi-finished products costs.

    The cost of acquiring the necessary raw materials and semi-finished products belongs to this group. This group of material costs is often the largest.

  2. Fuel and energy costs.

    Acquisition costs of gasoline, machine oil, gas, solid fuel, electricity, heat belong to this group.

  3. Packaging costs.

    Acquisition costs of various containers (boxes, bales, boxes) belong to these costs.

  4. Spare parts costs.

    Expenses of spare parts used to repair equipment, machinery or vehicles.

  5. Building materials costs.

    The cost of building materials arise when the company is building new facilities or making renovation of existing facilities.

  6. Other material costs.

    All material costs which are not included in the above groups related to other expenses. It may be, for example, waste production or other costs.

Material costs classification

This material costs classification is conditional and may be different in different fields of business.

As we have already noted, material costs make up a significant share of the total cost, so planning of the amount of material costs is closely related to the definition of competitive prices for the company’s products.

Material expenses should be planned according to their groups.

Raw materials and semi-finished products costs.

Raw materials and semi-finished products costs should be planned taking into account the planned volume of production and the rate of cost per unit of finished product.

Rate of cost per unit of finished product is determined by multiplying the technological expenses norms of individual materials at the price of such individual materials.

The total amount of these expenses can be determined by the formula:

Crm = PVp x Rc,

Crm – the sum of raw materials, semi-finished products costs,

PVp – planned production volume,

Rc – rate of cost per unit of finished product.

Fuel and energy costs.

Fuel and energy costs are defined similarly. The technological expenses of fuel and energy per unit determined first. Money rate of such costs per production unit defined after that.

Total amount of costs on fuel and energy determined by multiplying the planned volume of production at the money rate of such costs per production unit.

The fuel costs for cars can be defined by the formula:

Cf = Cn x Cm x (FCr/100) x Fp,

Cf – cost of fuel,

Cn – number of cars,

Cm – standard mileage per car, kilometers per month (year),

FCr – rate of fuel consumption per car per 100 kilometers, liters,

Fp – price per liter of fuel.

Packaging costs.

Packaging costs also depend on production volumes. These expenses are determined by multiplying the expected volume of production at the rate of packaging of finished products.

Costs for spare parts.

Planning of the costs for spare parts is difficult. These costs should be planned taking into account the degree of depletion of assets of the company.

There are no needs to plan costs for spare parts if company have new equipment and full guarantee for it.

The breakages of equipment are more likely if it is worn out. Costs for spare parts should be planned taking into account the specific proposals of maintenance in this case.

Costs of building materials.

Costs of building materials determined by the special estimates. These estimates give specific volume of construction or repair, and prices for such materials.

Other material costs.

Other material costs should be planned concretely to their types. These costs can be unpredictable very often, so their planned amount can be determined by using of their average percentage.

The average percentage of other material costs is the ratio of the amount of such costs to the cost of raw materials in previous periods.

Planned amount of other material costs can be calculated by the formula:

Omca = Crm x Pomc,

Omca – the amount of other material costs,

Crm – planned sum of raw materials and semi-finished products costs,

Pomc – The average percentage of other material costs.

Material costs plan of the company by their types we can make using the following table:

Material costs plan of the company

Type of material costs

1 Quarter

2 Quarter

3 Quarter

4 Quarter

Year

(column 2+3+4+5)

1

2

3

4

5

6

1. Raw materials and semi-finished products
2. Fuel and energy
3. Packaging
4. Spare parts
5. Building materials
6. Other material costs
Total material costs (p. 1+2+3+4+5+6)

      Plan of material costs should be adjusted depending on changes in the prices of material resources, on changes in plans of production and sales or on changes in production technologies.

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