Material, Labor and Expenses – Classification Based on Nature of Costs

The material, labor, and expenses are the common way of classifying costs of any manufacturing business based on the nature of cost. All the costs incurred can be classified into these three categories. Material means all kinds of material used to produce a product or service; labor means all types of human labor, and expenses mean all the remaining costs not falling under material and labor.

Material Cost

What is ‘Material’? The material here means all kinds of materials that are used to produce a product or service. The material may be the basic raw material and all other materials such as components, fuel, lubricants, packing material, other consumables, etc. Normally, the direct material is confused with materials, but material includes both direct and indirect materials.

Now the question is, “what is the material cost?” Material cost means the cost of acquiring the material. It clarifies that material cost does not only mean the cost of purchasing the material from the supplier. On the contrary, material cost includes all expenses directly attributed to the acquisition of any material.

For example, 1000 Kg of iron scrap is purchased at the rate of $0.5 per kg, and the freight cost of bringing the material to the factory is $10. The material cost is $510 ($1000*$0.5 + $10). So, all relevant costs and benefits are taken into consideration in finding out material costs such as inward freight, insurance, taxes, etc., and benefits such as duty drawback, refunds available on material cost, and any receipts from the sale of scrap generated from the material, etc.
Material, Labour and Expenses.

Labor Cost

What is labor? It means all the human efforts, whether physical or mental, are put to use to create a product or service. The labor does not only mean direct labor working in the factory. But it includes all the employees of the company in all departments. It includes all the permanent employees, temporary and contractual workers, etc. Or any other physical or mental labor source for which the company pays.

Now, what is labor cost? Labor cost means all the payments made by the company towards acquiring services of the labor as defined above. It means the salary and wages paid to the employee or wage earners along with all the fringe benefits such as provident fund contribution, gratuity, incentive, bonus, etc., provided to the employees.


Expense is a balancing category that contains all the expenses other than material and labor. These may include utility costs, expenses for material sent for job work from outside, audit expenses, depreciation, etc. These expenses are generally called overheads.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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