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

The material, labor and expenses is 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 for the production of a product or service, labor means all types of human labor and expenses means all the remaining costs not falling under material and labor.

Material Cost

What is ‘Material’? The material here means all kinds of materials which 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 what is the material cost? Material cost means the cost of acquiring the material. It clarifies one thing that material cost does not only mean the cost of purchasing the material from the supplier. On the contrary, material cost includes all expenses which are directly attributed to the acquisition of any material.

For example, 1000 Kgs of iron scrap is purchased at the rate of $0.5 per kg and 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.

Labor Cost

What is labor? The labor here means all the human efforts whether physical or mental put to use for creation of a product or service. The labor does not only mean the 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 source of physical or mental labor for which the company pays for.

Now, what is labor cost? Labor cost means all the payment 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 which contains all the expenses other than material and labor. These may include utility cost, an expense for material sent for job work from outside, audit expenses, depreciation etc. 

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