Elements of cost

Material Labor and Direct Expenses

1. Elements of cost Cost Accounting Prof.U.K.Teke

2. The management of an organization needs necessary data to analyse and classify costs for proper control and for taking decisions for future course of action. Hence the total cost is analysed by elements of costs i.e. by the nature of expenses. A cost is composed of three broad elements and they are materials, labour and other expenses.

3. Material The substance from which the product is made is known as material. It may be in a raw or a manufactured state “The material cost is the cost of commodities supplied to an undertaking”- I.C.M.A. Materials cost is of two types, viz. ( i ) Direct materials cost, and (ii) Indirect materials cost.

4. DIRECT MATERIAL ALL MATERIALS, WHICH BECOMES AN INTEGRAL PART OF THE FINISHED PRODUCT AND WHICH CAN BE CONVENIENTLY ALLOCATED TO SPECIFIC PHYSICAL UNITS IS TERMED AS DIRECT MATERIAL. DIRECT MATERIAL COST IS “THE COST OF MATERIALS ENTERING INTO AND BECOMING CONSTITUENT ELEMENTS OF A PRODUCT OR SALEABLE SERVICE”. COTTON USED IN PRODUCTION OF CLOTH, LEATHER USED IN THE CASE OF PRODUCTION OF LEATHER GOODS AND Primary packing material (e.g. – cartoon, wrapping, cardboard, boxes.) etc. ETC., ARE THE EXAMPLES OF DIRECT MATERIALS. ANY MATERIALS PURCHASED AND USED FOR A SPECIFIC JOB ARE ALSO DIRECT MATERIALS. Direct material is also described as raw-material, process material, prime material, production material, stores material, constructional material etc.

5. INDIRECT MATERIAL “MATERIALS USED FOR THE PRODUCT OTHER THAN THE DIRECT MATERIALS ARE CALLED INDIRECT MATERIALS. ALL MATERIAL, WHICH IS USED FOR SECONDARY PURPOSES AND CANNOT BE ALLOCATED CONVENIENTLY TO SPECIFIED PHYSICAL UNITS, IS CALLED AS INDIRECT MATERIAL. MATERIALS COST WHICH CANNOT BE IDENTIFIED WITH A SPECIFIC PRODUCT, JOB, PROCESS IS KNOWN AS INDIRECT MATERIAL COST. A FEW EXAMPLES ARE CONSUMABLE STORES, OIL AND WASTE, PRINTING AND STATIONERY MATERIAL, AND ETC. INDIRECT MATERIAL MAY BE USED AT THE FACTORY, OFFICE OR SELLING AND DISTRIBUTION DIVISIONS.

6. Labour Human effort required to convert materials into finished products is termed as labour . Labour COST is the remuneration paid for physical or mental effort expended in production and distribution. “The labour cost is the cost of remuneration (wages, salaries, commissions, bonus, etc.) of the employees of an undertaking” – I.C.M.A. Labour cost is also divided into direct and indirect portions: ( i ) Direct Labour Cost (ii) Indirect Labour Cost

7. (I)Direct Labour Cost It is also called ‘Direct-wages’. Direct labour cost is the cost of labour directly engaged in production operations. E.g., workmen engaged in assembling parts, carpenters engaged in furniture making, etc.Direct labour cost can be conveniently and specifically charged to specific products. (ii) Indirect Labour Cost Indirect labour cost is the remuneration paid for labour engaged to help the production operations, e.g., inspectors, watchmen, sweepers, store keepers, etc. The remuneration paid to these persons cannot be traced to a job, process or production order. The labour costs of idle time, overtime, holidays, etc., are also taken as indirect costs. Similarly, clerical and managerial staff, salesmen, distribution employees are also included in the orbit of ‘indirect labour ’.

8. Other Expense Expenditure other than material and labour is the third element of cost. It is defined by I.C.M.A. as- “The cost of service provided to an undertaking and the notional cost of the use of owned assets”. Expenses are of two types: ( i ) Direct expenses (ii) Indirect expenses.

9. Direct or Chargeable Expenses:- These are expenses which can be directly, conveniently and wholly allocated to specific cost centers or cost units. for eg . excise duty, royalty, surveyor’s fees, cost of rectifying, defective work, travelling expenses to the job, experimental expenses of projects, expenses, of designing or drawings, repairs and maintenance of plant obtained on hire and hire of special equipment obtained for a contract. Indirect expenses: - these are expenses which cannot be directly, conveniently and wholly allocated to cost centres or cost units.FOR EG. rent, insurance, municipal taxes, salary of manager, canteen and welfare expenses, power and fuel, cost of training for new employees, lighting and heating, telephone expenses, etc.

10. Overheads Cost related to a cost centre or cost unit may be divided into two i.e. Direct and Indirect cost. The Indirect cost is the overhead cost and is the total of indirect material cost, indirect labour cost, and indirect expenses. Indirect costs are those costs which are incurred for the benefit of a number of cost centers or cost units. Blocker and Weltmer define overhead as follows: "Overhead costs are operating cost of a business enterprise which cannot be traced directly to a particular unit of output . Further such costs are invisible or unaccountable ."

11. TYPES OF Overheads Manufacturing (works, factory or production) expenses Such indirect expenses which are incurred in the factory and concerned with the running of the factory or plant are known as manufacturing expenses . Expenses relating to production management and administration are included there in. Following are a few items of such expenses: Rent, rates and insurance of factory premises, power used in factory building, plant and machinery etc.

12. TYPES OF Overheads….. Selling and Distribution Expenses Expenses incurred for marketing of a commodity, for securing orders for the articles, dispatching goods sold, and for making efforts to find and retain customers are called selling and distribution expenses examples are:- Advertisement expenses, cost of preparing tenders, traveling expenses, bad debts, collection charges etc. Warehouse charges packing and loading charges, carriage outwards, etc.