Monthly Material Cost Formula
Learn how to calculate the monthly cost of raw materials used from inventory, purchases, freight, and returns.
Monthly material cost estimates the value of raw materials consumed during a reporting month. It starts with opening materials, adjusts purchases for inbound costs and returns, then removes materials still on hand at month end.
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Monthly Material Cost
Where:
Add the materials on hand at the start of the month to adjusted material purchases, then subtract the materials left at the end of the month.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| openingMaterialInventory - Opening Material Inventory | Value of raw materials on hand at the start of the month. | currency |
| materialPurchases - Material Purchases | Gross cost of raw materials purchased during the month before returns or allowances. | currency |
| inboundFreight - Inbound Freight and Handling | Directly attributable delivery, customs, receiving, or handling costs for purchased materials. | currency |
| purchaseReturns - Purchase Returns and Allowances | Supplier credits, returns, rebates, or allowances that reduce material purchase cost. | currency |
| closingMaterialInventory - Closing Material Inventory | Value of raw materials remaining on hand at the end of the month. | currency |
Step-by-Step Calculation
Record gross material purchases
Start with the total raw material purchases recorded for the month.
grossPurchases = materialPurchases
Calculate net material purchases
Add directly attributable inbound costs and deduct returns or allowances.
netMaterialPurchases = materialPurchases + inboundFreight - purchaseReturns
Calculate materials available for use
Combine the opening inventory with adjusted purchases made during the month.
materialsAvailable = openingMaterialInventory + netMaterialPurchases
Calculate monthly material cost
Deduct materials still held at month end because they were not used during the month.
monthlyMaterialCost = materialsAvailable - closingMaterialInventory
Monthly raw material cost calculation
Net material purchases
$25,000 + $1,000 − $500
$25,500
Materials available for use
$10,000 + $25,500
$35,500
Monthly material cost
$35,500 − $8,500
$27,000
Final Result
Estimated monthly material cost: $27,000.
Assumptions
- ✓All figures use the same currency and a consistent inventory valuation method.
- ✓Inbound freight and handling are included only when directly attributable to acquiring materials.
- ✓Returns, credits, and allowances relate to purchases included for the same month.
- ✓Opening and closing inventory are measured using consistent period cut-off procedures.
Limitations
- !The calculation estimates direct materials used; it does not include direct labour, factory overhead, selling costs, or tax unless included in an input.
- !Physical inventory differences, waste, theft, and write-downs can cause the calculated amount to differ from actual usage.
- !The appropriate treatment of specific costs can depend on the entity's accounting policies and reporting requirements.
Common Mistakes to Avoid
Using closing inventory from a different date or valuation basis than the opening inventory.
Including outbound customer delivery costs as inbound material freight.
Forgetting supplier credits, rebates, or returned materials.
Treating material purchases as materials used without deducting closing inventory.
Including labour or manufacturing overhead in a direct material input.
Related Formulas
Frequently Asked Questions
What is the formula for monthly material cost?
Monthly material cost equals opening material inventory plus material purchases plus inbound freight and handling, minus purchase returns and allowances and closing material inventory.
Why is closing material inventory subtracted?
It represents materials still on hand at month end, so those materials were not consumed during the month.
Should inbound freight be included in material cost?
This calculator includes freight and handling when they are directly attributable to obtaining the materials. Treatment can vary with accounting policy.
Do purchase returns reduce material cost?
Yes. Returns, supplier credits, and allowances generally reduce net purchases when they relate to the materials purchased in the period.
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