ELEMENTS OF COSTS

SHEET

Presented By:
Akansh Gupta
Rohit Kumar
WHAT IS COST?

ØThe amount which is incurred in production of

product.
A Cost is composed of three elements:

ØMaterial Cost
Ø
ØLabour Cost
Ø
ØExpenses
TYPES OF COSTS
MATERIAL COST

ØIt is the cost of commodities and material used by

the organization.

ØIt is of two types:

üDirect Material costs
ü
üIndirect Material costs
DIRECT MATERIAL

ØDirect Material indicates that material which can be

identified with the individual cost center.
Ø
Øwhich becomes an integral part of the finished goods.
ØFor example:
Ø
üCotton used in a textile mill.
üLeather in shoes.
üTimber in furniture.
INDIRECT MATERIAL
ØIndirect Material indicates that material which cannot be
identified with the individual cost center.
Ø
ØThis material assists the manufacturing process.
Ø
ØIt does not becomes an integral part of finished goods.
Ø
ØFor example:

üLubricating oil
üCoal
üStationery Material
LABOUR COST

ØIt is the cost of remuneration paid to the employees

of the organisation.

ØIt is of two types:

üDirect Labour cost

üIndirect Labour cost

DIRECT LABOUR
ØDirect Labour costs consists of wages paid to
workers directly engaged in converting raw
material into finished goods.

ØFor example:
üCarpenter
üTailor
üMachine operator
INDIRECT LABOUR
ØIndirect labour are not engaged in the
manufacturing process but only assist or help in
production operations

ØFor example:
üSupervisor
üCleaner
üPeon
üWatchman
EXPENSES
ØIt is the cost of services provided to the
organization and the notional cost of assets
owned.

ØIt is of two types:

üDirect Expenses costs

ü
üIndirect Expenses costs
DIRECT EXPENSES
ØDirect Expenses are those expenses, which can
be identified with the individual cost center.

ØFor example:

üHire charges for machinery.

ü
üCost of patent rights.
ü
üDepreciation or hire of a plant used on a
contract at site.
INDIRECT EXPENCES

ØIndirect Expenses are those expenses, which cannot

be identified with the individual cost centers.

ØFor example:
üRent
üInsurance
üLighting
üRepairs
ØThe aggregate of direct material cost, direct labour
Cost, direct expenses is termed as Prime cost

ØThe aggregate of Indirect material cost, Indirect labour

Cost, Indirect expenses is termed as Overheads.
 OVERHEAD

Overhead=Indirect Material + Indirect Labour + Indirect Expenses

ØOverhead are divided into three groups as follows:

üProduction Overhead

üOffice and administration overhead

üSelling and distribution overhead

The classification of overheads can be shown as below:
PRODUCTION OVERHEAD
ØIt is also Known as factory overhead, works
overhead and manufacturing overhead.
Ø

ØThis overhead mainly concerned with the production

of finished goods.
ØIndirect Material :- coal, oil, grease, etc.
Ø

ØIndirect Labour:- wages of factory sweeper, wages of

factory watchman, etc.
Ø

ØIndirect Expenses :- factory rent, repair and

maintenance of plant, etc.
OFFICE OVERHEAD
ØThis is the indirect expenditure incurred in general
administrative function i.e. in formulating policies,
planning, directing, etc.
Ø

ØThis overhead have no direct connection with

production or sales.
ØIndirect Material :- stationery used in office, postage.
ØIndirect Labour :- salery of office staff, saleryof
managing director, etc.
Ø

ØIndirect Expenses :- office rent, legal expence, etc.

SELLING OVERHEAD
ØSelling overhead is the cost of promoting sales and
retaining customer. For example advertisement cost,
samples, etc.
Ø

ØDistribution cost includes all expenditure incurred from

the time the product is completed until it reaches its
destination. For example carriage outward.
 Contd..

ØIndirect Material :- Packing material, oil, greace, etc.

ØIndirect Labour :- salery of sales manager, saleryof
sales office staff, etc.
Ø

ØIndirect Expenses :- advertising, travelling expenses,

rent of warehouse, etc.
THANK YOU