Elements of Cost

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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 Direct material is the material which can be conveniently identified with or allocated to cost centers and cost units. It refers to the material out of which a product is manufactured. For example, leather shoes are produced out of leather, butter is produced out of milk, steel utensils are produced out of stainless steel and so on. Thus, leather, milk and stainless steel are the direct materials for the manufacture of shoes, butter and steel utensils respectively. Like direct material, another kind of material may be required for manufacturing but not directly. For example, machines used for production require lubricants, jute and cotton wastes etc. which are indirect materials. Direct material is a component of prime cost and indirect material is a component of factory overhead. Direct material directly varies with the output whereas indirect material does not so. Direct Wages Direct wages are the wages which can be conveniently identified with or allocated to cost centers and cost units. It refers to the wages paid to the workers who actually produce goods. In case of manual work, it is not difficult to locate direct worker because he is the one who produces goods. In case of the work done by a machine, the person who collects input and

output and in whose account the output is credited for the purpose of payment of wages is direct worker. There are several other workers in a factory who help direct workers in connection with their work with regard to supply of materials, power etc. and in respect of supervision and maintenance. These are indirect workers and wages of indirect workers at different stages of production are indirect wages. Direct wage is a component of prime cost whereas indirect wage is a component of factory overhead. The former directly varies with the output whereas the latter may not vary so. Direct Expenses Besides direct material and direct layout, certain expenses may be wholly and exclusively necessary for a particular production....
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