Element of Costs

ELEMENT OF COSTS

1. Manufacturing costs
• Manufacturing costs are production/factory costs which refer to all costs
incur in production process
• Element of manufacturing costs are materials, labour and overhead
• Direct costs – costs that can be identified directly to a product
o Direct materials costs – raw materials purchase and later issue to
production department. E.g. floor, eggs, sugar for bread
production.
o Direct labour costs or Direct wages – wages of employees who
physically handle the raw materials and later converted the raw
materials into finished goods. E.g. baker’s wages for bread
production, carpenter or wood cutter’s wages for furniture.
o Direct expense – cost incurred specifically for a particular
product. E.g. hiring of special machine, royalty payable
• Indirect costs – costs that cannot be identified directly to a product
o Indirect materials + indirect labour + indirect expense =
Overheads
• Conversion costs – costs of converting raw materials into finished goods
i.e. direct labour costs + direct expense + overheads
• Total of direct materials, direct labour and direct expenses are known as
prime costs
• This prime costs comprises of all direct costs i.e. costs that can be
traceable/identified to the product
• Prime costs are primary costs or important costs to be incurred in any
production process
• Total of indirect materials, indirect labour and indirect expenses are
known as overhead
• Overhead is the totaled of indirect costs i.e. costs that cannot be
traceable to the products but they do form part and parcel of the
product cost
• Total of direct labour, direct expense and overhead is known as
conversion costs
• Conversion costs are costs incur to convert materials into finished goods
• Statement of Cost – comprise information regarding the costs for a
product or cost unit
 Element of Costs

Statement of Cost

RM
Direct material cost X
Direct labour cost X
Direct expense X__
Prime costs XXX
+ Factory overheads X__
Production Costs XXXX
+ Admin, Selling, Distribution X__
Costs XXXX
Total costs =====

2. Non Manufacturing costs

• It is referring to costs which are not involved in the production process
• The costs are administrative costs, selling and distribution and other
• They are considered as period cost and written of to the profit and loss
account
ELEMENT OF COSTS DIAGRAM

TOTAL COSTS

NON – MANUFACTURING
MANUFACTURING COSTS
COSTS

Materials Administrative Marketing R&D

Labour Expenses

Direct costs Indirect costs

Prime Costs Production

Overhead