Do I count the cost of material pre-processing as collection expenditure?

Sometimes, as with leased items, preprocessing is part of the normal price and can't be separated out.  In such a case, consider the pre-processing as part of the material cost.

If the preprocessing is discretionary, exclude it from the collection expense.

Here's why.

Your statistics paint a picture of what it really takes to run your library for a year.  If you didn't pay for the vendor to laminate covers, produce labels, etc., you would have volunteers or staff do it.  The expenses for this would be listed in "Other operating expenditures."   If library X had its materials preprocessed and counted this as collection expense, and library Y did processing inhouse, it would really skew a comparison.