# Material Costing – Introduction

## What is Material?

Material simply means all the commodities or physical objects used to make the final product.

## Classification of Material

DIRECT MATERIAL	INDIRECT MATERIAL
Materials whose cost can be directly attributable or traced to the end product.	Materials whose cost cannot be directly traced to the end product.
Example: Wood used in a table.	Example: Lubricating oil for machines.

## Flow of Documents in Material Procurement

The sequence of documents used by various departments in material procurement and issue:

### From Production / Engineering side:

1. Bill of Materials – prepared by Engineering / Planning Department; lists all materials needed.

2. Material Requisition – issued by Production Dept to Store to draw materials.

3. Purchase Requisition – sent by Store to Purchase Dept when stock is low.

### Purchase Department processes:

4. Tender or Request for Proposal (RFP) – sent to potential suppliers.

5. Purchase Order – sent to selected supplier.

### Supplier side:

6. Performa Invoice – sent by supplier (advance bill).

7. Payment – made by buyer if required upfront.

8. Invoice – formal bill from supplier.

9. Goods delivery with Challan / Invoice – goods sent to store.

### Store side:

10. Goods Returned Note – if goods are returned to supplier.

11. Goods Received Note (GRN) – prepared on receipt of goods.

12. Material Returned Note – when production returns excess material.

13. Material Abstract – summary of materials issued for production.

## Key Departments Involved

Understanding which document is generated by which department — and in what sequence — is frequently tested in CA Inter exams.

Worked example

### Example 1

Example – Document Flow:

A production manager needs steel for a new order:

1. Engineering prepares the Bill of Materials listing steel grade & quantity.

2. Production issues a Material Requisition to Store.

3. Store finds stock low and sends Purchase Requisition to Purchase Dept.

4. Purchase Dept invites Tenders / sends RFP.

5. Selects supplier; issues a Purchase Order.

6. Supplier ships with Invoice + Challan.

7. Store receives and issues Goods Received Note (GRN).

8. Material issued to production; recorded in Material Abstract.

⚠️ Common exam mistakes

Confusing Bill of Materials (engineering plan) with Material Requisition (production's request to store).
Confusing Purchase Requisition (Store → Purchase) with Purchase Order (Purchase → Supplier).
Forgetting that Goods Received Note (GRN) is prepared by Store, not Purchase Dept.
Mixing direct and indirect material — direct = traceable to single product; indirect = used across multiple products or for general purpose.

Reference:

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Introduction to Material Costing & Procurement Documents

Worked example