## Material Cost — Meaning & Valuation
### What is 'material'?
All commodities / physical objects used to make the final product. It may be direct or indirect.
| Direct Material | Indirect Material |
|---|---|
| Cost is directly attributable to the end product in an economically feasible way. | Not directly attributable to a particular final product. |
Direct material is a significant cost element, so it needs adequate management attention.
### Valuation of Material Receipts
Valuation = ascertaining the cost of material purchased. Cost of material =
> Cost of purchase (net of trade discounts, rebates, duty draw-back, input credit availed, etc.) + other costs incurred in bringing inventories to their present location and condition.
### Treatment of items on a purchase invoice
Discounts & Subsidy
| Item | Treatment |
|---|---|
| Trade Discount | Deducted from purchase price (if not already shown as deduction in invoice). |
| Quantity Discount | Deducted from purchase price (if not already shown). |
| Cash Discount | NOT deducted — it is a finance/interest item and is ignored. |
| Subsidy / Grant / Incentive | Deducted from cost of purchase. |
Duties & Taxes
| Item | Treatment |
|---|---|
| Road Tax / Toll Tax (paid by buyer) | Included in cost of purchase. |
| GST | Excluded if input credit is available; unless specified, do not include in cost. |
| Custom Duty | Added to purchase cost. |
Penalties & Charges (abnormal — excluded)
| Item | Treatment |
|---|---|
| Demurrage (penalty for delay in loading/offloading) | Abnormal — not included. |
| Detention charges / Fine (non-compliance) | Abnormal — not included. |
| Penalty (any type) | Not included. |
Other Expenditure
| Item | Treatment |
|---|---|
| Insurance charges (in transit) | Added. |
| Commission / Brokerage paid | Added. |
| Freight inwards | Added (directly attributable to procurement). |
| Cost of containers | Non-returnable → added. Returnable & fully refunded → not included. If refund < amount paid → only the shortfall is added. |
Memory hook: Normal, attributable-to-bringing-in costs are added; finance items (cash discount) are ignored; abnormal penalties (demurrage, detention, fines) are excluded; creditable GST is excluded.