elementsofcost-191123093127.pdf

ELEMENTS OF COST

1. ELEMENT
S OF
COST

2. ELEMENTS OF
COST
Theelementsofcostarethefactorson
thebasisofwhichexpenditureis
incurred.Itmaybedefinedasagroup
nameofsmallercostsofidentical
nature.Elementsofcostmakethe
analysisofthecosteasyandfacilitate
maximuminformationregardingcoststo
themanufacturers.

3. COST
Costreferstotheexpenditureincurredonproducing
thegoodsandservices.Itrepresentsthesacrifice,
foregoingorareleaseofsomethingofvalue.
ACCORDINGTOICMA(InstituteofCostand
ManagementAccountants),London
‘Costistheamountofexpenditure(actualor
notional)incurredonorattributabletoagiven
thing.”
Example:Inmanufacturingofautomobiles,the
expenditureincurredonitsspareparts,paintingand
finishing,design,etcconstitutethecostofthe
automobile.

4. ELEMENTS
OF COST
MATERIAL
COST
Direct Material
Cost
Indirect Material
Cost
LABOR
COST
Direct Labor Cost
Indirect Labor Cost
EXPENSES
Direct Expenses
Indirect Expenses
or Overheads

5. MATERIAL
COST
Itreferstothecostofthematerialthatis
suppliedtothemanufacturingunitfor
producingthefinishedproduct.
Example:Costofthread,nails,shoe
polish,leathersuppliedtoan
undertakingengagesinproductionof
shoesconstitutematerialcost.

6. MATERIAL COST
DIRECT MATERIAL COST
Directmaterialcost
isthecostofthose
materialsthatcanbe
easilyidentifiablein
thefinishedproduct.
Example:
Cost of leather in shoes.
Cost of glass in mirror.
Cost of iron in machinery.
INDIRECT MATERIAL COST
Indirect Material Cost is
the cost which is not
directly attributable to
the finished product.
These costs are not
absorbed or apportioned
by the cost units or cost
centers directly.
Example:
Fuel or electricity needed
for generating power.
Materials consumed for
repair work.

7. LABOR COST
Laborcostreferstothecostof
remunerationoftheworkersemployed
inanorganization.Itincludesthe
amountofwages,salaries,perquisites,
allowancesetc.
Example:
Salarypaidtoworkmen
Commissionpaidtoagents

8. LABOR COST
DIRECT LABOR
COST
These are also known as
direct wages. This cost
can be identified with and
allocated to cost centers
or cost units.
Example:
Wages paid for spinning
yarn in a spinning mill.
Wages paid to the driver
and conductor of a bus.
INDIRECT LABOR
COST
Thesearealsoknownas
indirectwages.Itrefers
tothatpartoflaborcost
whichisnotdirectly
attributabletothecost
centersorcostunits.
Example:
Salarypaidtothe
manager,Salarypaidto
theguardoftheoffice.

9. EXPENSES
Expensesrefertothecostofservices
providedtoanundertakingandthe
notionalcostsoftheuseoftheassets
ownedbythebusinesshouse.
Example:Deprecationonbuilding,plant
andmachineryetc.

10. EXPENSES
DIRECT EXPENSES
These expenses are also
called chargeable
expenses. These expenses
can be directly identified
to the cost centers or cost
units.
Example:
Carriage and freight paid
on direct materials
purchased.
Import duty
Octroiduty etc.
INDIRECT EXPENSES
(OVERHEADS)
Expenses which cannot be
allocated to the cost centers
or units but can be
apportioned by them are
known as overheads or
indirect expenses.
Example:
Rent, rates and taxes
Repairs to machinery
Factory lighting
Office lighting
Depreciation and insurance of
showroom building etc.

11. OVERHEADS
OFFICE AND
ADMINISTRATIVE
OVERHEADS
FACTORY
OVERHEADS
SELLING AND
DISTRIBUTION
OVERHEADS

12. OVERHEADS
•It includes all the indirect costs incurred in factory
in respect of manufacturing operations.
•Example: Cost of lubricating oil, coal, gas and
fuel, etc.
FACTORY
OVERHEADS
•It includes all the indirect costs relating to
direction, guidance, management, control and
administration of business concern.
•Example: Salary of general manager, insurance
expenses, etc.
OFFICE AND
ADMINISTRATION
OVERHEADS
•These include all indirect costs which are incurred
for Promoting the sales, Retaining the customers,
Providing after sale services to the consumers
•Example: advertisement, salary of sales manager
etc.
SELLING AND
DISTRIBUTION
OVERHEADS