ELEMENTS OF COST

 

A cost is composed of three elements i.e. material, labour and expenses. Each of these elements may be direct or indirect. This is shown as follows :

Direct Costs Indirect Costs
Direct Material Indirect Material
Direct Labour Indirect Labour
Direct Expenses Indirect Expenses

Material Cost It is the cost of material of any nature used for the purpose of production of a product or a service. Materials may be Direct Material or Indirect Material.

Direct material : It is the cost of basic raw material used for manufacturing a product. Direct materials generally became a part of the finished product. No finished product can be manufactured without basic raw material. This cost is easily identifiable and chargeable to the product. For e.g. Leather in leather products, Steel in steel furniture, Cotton in textile etc. Direct material includes the following.

1) All materials specially purchased for production or the process.

2) All components purchased for production or the process.

3) Material transferred from one cost centre to another or one process to another process.

4) Primary packaging materials, wrappings, cardboard boxes etc necessary for production or protection of product. However, in many cases, though a material forms a part of the finished product, yet it is not treated as direct material.

Eg. nails used in furniture, thread used in stitching garments etc. This is because value of such materials is so small that it is quite difficult to measure it.

Indirect material : It is the cost of material other than direct material which cannot be charged to the product directly. It can not be treated as part of the product. These are minor in importance. It is also known as expenses materials. It is the material which cannot be allocated to the product but can be apportioned to the cost units.

Examples : Lubricants, Cotton waste, Grease, Oil, Small tools, Minor items like thread in dress making, nails in furniture (nuts, bolts in furniture) etc. Therefore, indirect materials can not be easily identified with specific job. They may not vary directly with the output. It is considered as a part of overheads.

Labour Cost This is the cost of remuneration in the form of wages, Salaries, Commissions, Bonuses etc. paid to the workers and employees of an organisation.

Direct Labour Cost : Direct Labour Cost is the amount of wages paid to those workers who are engaged on the manufacturing line. It consists of wages paid to workers engaged in converting of raw materials into finished products. The amount of wages can be conveniently identified with a particular line, product, job or process. These workers directly handle machines on the production line. Direct wages include payment made to the following group of workers.

1)    Labour engaged on the actual production of the product

2)    Labour engaged in aiding the operation viz. supervisor, foremen, shop Clerks and worker on internal transport.

3)    Inspectors, Analysts, needed for such production.

Example : Carpenter in furniture making unit, tailor in readymade wear unit, Labour in construction work etc.

          Indirect Labour Cost : It is the amount of wages paid to those workers who are not engaged on the manufacturing line. It is of general character and can not be directly identified with a particular cost unit. This indirect labour is not directly engaged in the production operations but such labour assist or help in production operations. It can not be easily identified with specific job, contract of work order. It may not vary directly with the output. It is treated as part of overheads.

Example : Labour in Human Resource department, Labour in payroll department, Labour in stores, Labour in Securities Department, Labour in power house department etc.

Expenses All costs other than material and labour are termed as expenses. It is defined as the cost of services provided to an undertaking and the notional cost of the use of owned assets.

Direct Expenses : It is the amount of expenses which is directly chargeable to product manufactured or which may be allocated to product directly. It can be easily identified with the product. These are the expenses which are specifically incurred in connection with a particular job or cost unit. They are also called as chargeable expenses.

Example : Hire of special plant for a particular job, Travelling expenses in securing a particular contract, Carriage paid for materials purchased for specific job, Royalty paid in mining or production etc.

Indirect Expenses : All indirect costs other than indirect materials and indirect labour costs, are termed as indirect expenses. It is the amount of expenses which can not be charged to the product directly. These can not be directly identified with particular job, process or work order and are common to cost units‟ or cost centers. Indirect expenses include factory expenses, administrative overheads, selling and distribution expenses etc.

 

Overhead

This is the aggregate of indirect material cost, indirect labour cost and Indirect expenses. Thus overhead= Indirect Material + Indirect Labour + Indirect Expenses

 

 

 

 

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