Elements of Cost
Lesson-13 Elements of Cost and Cost Sheet Learning Objectives • • • To understand the elements of cost To classify overheads on different bases To prepare a cost sheet
Elements of Cost Raw materials are converted into finished products by a manufacturing concern with the help of labor, plants etc. The elements that constitute the cost of manufacturing are known as elements of cost. The elements of cost include the following: • • • Material Labor Expenses
Each of these elements is again subdivided into direct and indirect material. Direct material, direct labor and direct expenses are those which can be traced in relationship with a particular process, job, operation or product. Indirect material, indirect labor and indirect expenses are those which are of general nature and cannot be traced in relationship with a particular process, operation, job or product. Direct material Direct labor Direct expenses Indirect material Indirect labor Indirect expenses together constitute prime cost
of the factory together constitute factory (or works)
Prime cost + Factory (or works) overhead = Factory cost or works cost Factory cost + Administration overhead = Cost of production Cost of production + Selling and distribution overhead = Total cost or cost of sales While working out the cost of sales, following details are to be kept in mind: Opening stock of raw material Add: Purchasing of raw materials Less: Return to suppliers Less: abnormal loss of materials Rs. *** *** *** *** Rs.
Less: Closing stock of raw materials Raw material consumed Direct wages Direct expenses Prime cost Factory overhead expenses Add: Opening work in process Less: sales of scraps Less: closing work in process Factory cost or works cost Office and administration overhead Cost of production Add: Opening finished stock Less: closing finished stock Cost of production of goods sold Selling overhead Distribution overhead Total cost or cost of sales Profit Selling price Key Terms Direct Material
Elements of Cost Raw materials are converted into finished products by a manufacturing concern with the help of labor, plants etc. The elements that constitute the cost of manufacturing are known as elements of cost. The elements of cost include the following: • • • Material Labor Expenses
Each of these elements is again subdivided into direct and indirect material. Direct material, direct labor and direct expenses are those which can be traced in relationship with a particular process, job, operation or product. Indirect material, indirect labor and indirect expenses are those which are of general nature and cannot be traced in relationship with a particular process, operation, job or product. Direct material Direct labor Direct expenses Indirect material Indirect labor Indirect expenses together constitute prime cost
of the factory together constitute factory (or works)
Prime cost + Factory (or works) overhead = Factory cost or works cost Factory cost + Administration overhead = Cost of production Cost of production + Selling and distribution overhead = Total cost or cost of sales While working out the cost of sales, following details are to be kept in mind: Opening stock of raw material Add: Purchasing of raw materials Less: Return to suppliers Less: abnormal loss of materials Rs. *** *** *** *** Rs.
Less: Closing stock of raw materials Raw material consumed Direct wages Direct expenses Prime cost Factory overhead expenses Add: Opening work in process Less: sales of scraps Less: closing work in process Factory cost or works cost Office and administration overhead Cost of production Add: Opening finished stock Less: closing finished stock Cost of production of goods sold Selling overhead Distribution overhead Total cost or cost of sales Profit Selling price Key Terms Direct Material