Cost and Management Accounting · Material Cost

Material Cost: Meaning and Procurement Procedure (CA Intermediate)

Updated 4 October 2026 · Fact-checked

Material cost is the cost of materials consumed to make a product or provide a service. It splits into direct and indirect materials. The purchase procedure runs from requisition to enquiry, purchase order, receipt and inspection, Goods Received Note (GRN), bill checking and payment. Answer by naming each document and its purpose.

Understand Material Cost Meaning and Procurement Procedure

Material cost is the cost of the materials used in producing goods or services. In most manufacturing firms it is the largest element of cost, so controlling it matters. It includes the purchase price, plus costs needed to bring the material to the factory, less trade discounts and similar rebates.

Materials are classified as direct or indirect. Direct materials are those that can be traced to a specific cost unit and form part of the finished product. Examples: timber in furniture, steel in a machine. Indirect materials cannot be traced to a unit in an economical way, or are not part of the product. Examples: lubricants, cotton waste, cleaning supplies, small consumables. Their cost is treated as a factory overhead, not as direct cost.

A material may be indirect even if it is physically present in the product. If the amount is tiny, like thread in a shirt, tracing it is not worth the effort, so it is treated as an indirect material.

Procurement needs a clear procedure with checks at each step. The aim is to buy the right quality, in the right quantity, at the right price, from the right source, at the right time. Each step produces a document, and each document creates a control. The store, purchase, accounts and receiving departments all take part, so no one person controls the whole cycle.

The usual flow is: need identified, purchase requisition, selecting suppliers and getting quotations, purchase order, receiving and inspecting goods, Goods Received Note (GRN), checking the supplier's invoice against the order and GRN, and finally payment. Exams usually ask you to list this flow with the purpose of each document.

Key rules to remember

Cost of purchase (material cost): Material cost = Invoice price + Freight inward + Insurance in transit + Octroi/duties not recoverable + Other directly attributable costs − Trade discount − Rebates; Do not include taxes that are recoverable as credit (such as GST input credit). Cash discount for early payment is usually kept out of the material cost.
Direct material test: Direct material = Traceable to the cost unit AND forms part of the product economically; If either condition fails, treat it as an indirect material and put it in overheads.
Procurement document flow: Purchase requisition → Enquiry/Quotation → Purchase order → Receipt and inspection → GRN → Invoice check → Payment; Learn this order. Questions often ask who raises each document and why.

How to solve Material Cost Meaning and Procurement Procedure questions

Use this method for theory questions on procurement and for short numericals on material cost.

1Read the question and decide whether it asks for meaning, classification, procedure or a cost calculation.
2For classification, apply the test: can the material be traced to the unit and is it part of the product? Then label it direct or indirect.
3For procedure, write the steps in order. Next to each step name the document, who raises it and its purpose.
4Add the control point at each stage, such as matching the GRN with the purchase order and invoice before payment.
5For a cost calculation, start with the invoice price and deduct trade discount first.
6Add freight, insurance and non-recoverable duties. Exclude recoverable taxes and cash discount.
7Divide by quantity if a cost per unit is needed. Adjust for normal loss if the question states it.
8State the final answer with a one-line note on what you included or excluded.

Quickest way: Document chain and cost build-up

When to use it: Use it for 1 or 2 mark MCQs and for written answers where time is short.

For MCQs on procedure, remember the chain: Requisition, Order, GRN, Invoice check, Payment. The GRN comes after inspection and before payment.
For direct vs indirect MCQs, ask: can I trace it to the unit cheaply? If not, it is indirect.
For cost MCQs, start from the invoice amount, subtract trade discount, add freight and non-recoverable duty, ignore recoverable GST.
In written answers, use a short table-like list with each document in bold followed by its purpose. This earns step marks.
Close with one line on control: three-way matching of order, GRN and invoice.

Common mistakes in Material Cost Meaning and Procurement Procedure

Treating every material in the product as direct material.
Students look at physical presence and ignore whether tracing is economical.
Fix: Apply the tracing test. Minor items such as thread, glue or nails go to overheads as indirect materials.
Including recoverable GST in material cost.
The invoice total looks like the cost.
Fix: Exclude taxes for which input credit is available. Include only non-recoverable duties and taxes.
Deducting cash discount while computing material cost.
Students mix trade discount and cash discount.
Fix: Deduct trade discount. Treat cash discount as a financial item outside material cost unless the question says otherwise.
Confusing purchase requisition with purchase order.
Both names sound alike.
Fix: The requisition is an internal request from the store or user department. The order is the external document sent to the supplier by the purchase department.
Placing the GRN before inspection or skipping it.
Students memorise the document names but not the sequence.
Fix: Goods are received and inspected first. The GRN then records the quantity accepted and rejected, and it supports bill passing.
Naming documents without stating their purpose.
Students rush to list steps.
Fix: Write a purpose or control for every document. Examiners give marks for the reason, not just the name.

Worked examples

Example 1

A company purchases 1,000 kg of raw material at ₹120 per kg. Trade discount is 10%. Freight inward is ₹4,000 and insurance in transit is ₹2,000. GST of ₹19,440 is paid and full input credit is available. A cash discount of ₹1,500 is received for early payment. Compute the material cost and the cost per kg.

Show the solution

Gross invoice price = 1,000 × ₹120 = ₹1,20,000.
Trade discount = 10% of ₹1,20,000 = ₹12,000. Net price = ₹1,08,000.
Add freight inward ₹4,000 and insurance ₹2,000. Total = ₹1,14,000.
GST is recoverable as input credit, so exclude it.
Cash discount is a financial item, so do not deduct it.
Cost per kg = ₹1,14,000 ÷ 1,000 = ₹114.

Answer: Material cost = ₹1,14,000. Cost per kg = ₹114.

Example 2

Explain the purchase procedure for materials in a manufacturing company, from requisition to payment.

Show the solution

Purchase requisition: the store keeper or user department sends it to the purchase department when stock reaches the reorder level or a new need arises. It authorises the buying and states quantity, quality and date needed.
Selecting suppliers and quotations: the purchase department invites quotations from approved suppliers and compares price, quality, delivery and terms. This secures the best source.
Purchase order: the purchase department sends it to the chosen supplier after approval. It is a legal offer with specifications, price, quantity, delivery and payment terms. Copies go to the store, accounts and the requisitioning department.
Receipt and inspection: the receiving section checks the goods against the purchase order and delivery note. Inspection checks quality and quantity and separates rejected goods.
Goods Received Note (GRN): the store prepares it for goods accepted, showing quantity received and rejected. It is the proof of receipt and goes to purchase and accounts.
Checking the invoice: the accounts department matches the supplier's invoice with the purchase order and GRN for price, quantity and terms. This is three-way matching.
Payment: after approval, the accounts department pays the supplier and records the purchase in the books and the stores ledger.

Answer: The sequence is requisition, quotations, purchase order, receipt and inspection, GRN, invoice checking and payment. Each stage creates a document and a control, so goods are bought only when needed and paid for only when received correctly.

Exam tips

For procedure questions, write the steps in order, each with its document name and purpose. This is the usual marking pattern.
In numericals, show the cost build-up line by line so you earn step marks even if one item is wrong.
Read whether the GST is recoverable. Most CA Intermediate cost questions ignore recoverable GST in material cost.
For direct vs indirect questions, give one example of each and the reason for the classification.
In MCQs, watch for traps on trade discount versus cash discount. Attempt every MCQ since there is no negative marking.

Practice questions from Material Cost

Material Cost Meaning and Procurement Procedure in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediateProcurement and Purchase Procedure

Material Cost Meaning and Procurement Procedure: frequently asked questions

What is the difference between direct and indirect materials?

Direct materials can be traced to a specific cost unit and form part of the finished product. Indirect materials cannot be traced economically or do not form part of the product. Their cost goes into factory overheads.

What is a GRN in cost accounting?

A Goods Received Note is a document prepared by the store or receiving department after goods are received and inspected. It records quantities accepted and rejected. It is used to verify the supplier's invoice before payment.

Who raises the purchase requisition and the purchase order?

The store keeper or user department raises the purchase requisition. The purchase department raises the purchase order and sends it to the supplier.

Is freight inward part of material cost?

Yes. Freight inward, insurance in transit and non-recoverable duties are costs of bringing materials to the factory, so they are added to the purchase price. Trade discounts are deducted.