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Elements of Cost

In order to implement the effective cost control for the sound managerial decisions, the management may be provided with adequate data. For the purpose of achieving the above objectives, the total cost of the product is analyzed by the elements of cost i.e., nature of expenses. Actually, the product cost is divided into three elements i.e., Material, Labour, and Overheads.

The elements of cost show the following graphical form.

 

By Grouping the above elements of cost, the following divisions of costs are obtained.

(i)  Direct Material + Direct Labour = Prime Cost

(ii) Prime Cost + Works or Factory Overheads = Works or Factory Cost.

(iii) Cost Production + Selling and Distribution Overhead = Total Cost (Cost of Sales)

(iv)  Work cost + Administration Overhead = Cost of Production

Strictly Speaking the Elements of Cost can be classified into

  • Direct Material
  • Direct Labour
  • Overheads.

 Direct Material

Direct materials are those materials which can be directly identified with each unit of the finished product. It directly enters the production process and forms a part of the finished product. Direct materials can be classified in the following forms :

 (i)    All raw materials

(ii)   Raw Materials specifically purchased for specific job

(iii)   Parts purchased or produced

(iv)  Packing materials.

 Direct Labour

Direct wages refer to all labour expenses in altering the construction, composition, confirmation of the product. Simply, it is that labour which can be conveniently identified or attributed wholly to a particular job or converting raw material into finished goods. Wages of such labour force are known as direct wages.

Overheads

It may be defined as the aggregate of the cost of indirect materials, indirect labour and some other expenses including services which cannot conveniently be charged to particular cost unit or cost centre. Generally overheads may be sub divided into the following categories :

(i)  Production overhead or factory overhead or manufacturing overhead

(ii)  Administrative overhead

(iii) Selling overhead

(iv)Distribution overhead.