A heterogeneous object is referred to as a solid object made of different constituent materials. The object is of a finite collection of regions of a set of prescribed material classes of continuously varying material properties. These properties have a discontinuous change across the interface of the material regions. In this paper, we propose a level-set based variational approach for the design of this class of heterogeneous objects. Central to the approach is a variational framework for a well-posed formulation of the design problem. In particular, we adapt the Mumford-Shah model which specifies that any point of the object belongs to either of two types: inside a material region of a well-defined gradient or on the boundary edges and surfaces of discontinuities. Furthermore, the set of discontinuities is represented implicitly, using a multi-phase level set model. This level-set based variational approach yields a computational system of coupled geometric evolution and diffusion partial differential equations. Promising features of the proposed method include strong regularity in the problem formulation and inherent capabilities of geometric and material modeling, yielding a common framework for optimization of the heterogeneous objects that incorporates dimension, shape, topology, and material properties. The proposed method is illustrated with several 2D examples of optimal design of multi-material structures and materials.