The various elements of cost :
There are three basic elements of cost :
(i) Material;
(ii) Labour; and
(iii) Expenses. All the three elements are further divided into two categories ; (a) Direct; and (b) Indirect. The direct cost is also known as Prime Cost which is a sum of Direct Material, Direct Labour and Direct Expenses. Indirect cost is known as Overheads. The elements of cost are shown in diagram.
(i) Material Cost : Material cost refers to the cost of substances from which the product is made. Materials enter into the production process and form part of the finished product. For example, paper used in book.
Materials can be divided into two categories :
(a) Direct Material: All materials which become an integral part of the finished ‘ product and which can be easily measured and directly charged to the product are called direct material.
(b) Indirect Material : Indirect materials are those materials which cannot be ‘ directly assigned, to the specific product but which can be apportioned. For Example : Oil, Nails, Small tools etc.
(ii) Labour Cost: The cost of human effort required for converting the material into the finished product is called labour cost. It is the aggregate amount of remuneration paid to workers, supervisors and managers. Labour can be direct or indirect.
(a) Direct Labour : The labour which can be wholly and directly identified with a particular product is called direct labour, e.g., wages paid to the machine operator or wages paid to the carpenter in furniture factory.
(b) Indirect Labour : Indirect labour means the labour which cannot be wholly and directly identified with a particular product. It is the labour employed for performing tasks incidental to manufacture. Wages paid to storekeeper, foremen, timekeeper, inspectors, etc., are examples of indirect labour.
(iii) Expenses : Costs incurred other than on material and labour for production and distribution and for management of the organisation are called expenses. Expenses may be direct or indirect as follows :
(a) Direct Expenses : The expenses which can be wholly and directly identified with a particular product are called direct expenses. Hire charges of a machine used for a particular job, rent of the room in which a specific product is being produced are examples of direct expenses.
(b) Indirect Expenses : Indirect expenses are those expenses which cannot be wholly and directly identified with a specific product or job. These expenses include factory expenses, office expenses and selling expenses. Indirect expenses are also known as overheads.
Overheads are of three types :
1. Factory or Manufacturing Overheads : Materials : Oil, Consumable Shores etc. Labour : Salary of Storekeeper etc. Expenses : Power and fuel etc.
2. Office and Administrative Overheads: Materials : printing stationary etc. Labour : Salaries of office managers, clerks etc. Expenses : Office rent, legal expenses etc.
3. Selling and Distribution Overheads : Materials : Price list, catalogues etc. Labour : Sales Commission etc. Expenses : Advertising, rent etc.
