Element of cost means the grouping of costs according to their common characteristics. Further, cost is the amount of resource given up in exchange of some goods or services.
It is defined as the amount of expenditure (actual or notional) incurred on or attributable to a specified article, product or activity.
The element of cost is useful to determine the total cost. Following are the element of cost:
- Material cost
- Labor(employee) cost
- Other expenses
1. Material cost:
Material cost is further subdivided into:
a) Direct material cost and
b) Indirect material cost
Now lets study this in detail.
a) Direct material cost :
Materials which are present in the finished product or cost can be economically identified in the product are termed as direct materials. For example: cloth in dress making, material purchased for specified job and wheat or purpose floor for making cookies and cake etc.
However, in some cases a material may be direct but it is treated as indirect, because they used in little quantity.
b) Indirect material cost:
Materials which do not normally form part of the finished product (cost object) are known as indirect materials. These are as follows:
- Stores used for maintaining machines and building (bricks, cotton waste or lubricants)
- Stores used by service departments like power house , boiler house , canteen etc.
2. Labor(employee) cost:
labor cost further sub-divided into:
a) Direct labor
b) Indirect labor
a) Direct labor:
Labor which can be economically identified or attributed wholly to a cost object is termed as direct labor. For example, employee engaged on the actual production of the product or in carrying out the necessary operations for converting the raw materials into finished product.
b) Indirect labor:
Labor cost which cannot be allocated but can be apportioned to or absorbed by cost units or cost centers is known as indirect labor. Examples of indirect labor includes salary paid to foreman and supervisors, maintenance workers etc.
3. Other expenses:
Other expenses further sub-divided into:
a) Direct expenses
b) Indirect expenses
a) Direct expenses:
All expenses other than direct material and direct labor which are specifically incurred for a particular cost object and can be identified in an economically feasible way are termed as Direct expenses. For example hire charges for some special machinery , cost of defective work etc.
b) Indirect expenses:
Expenses other than direct expenses are known as indirect expense. Further, these cannot be directly, conveniently and wholly allocated to cost centres. Factory rent and rates, insurance of plant and machinery, power, light, heating, repairing, telephone etc., are some examples of indirect expenses.
Indirect expenses further divided into overheads expenses.
Overheads: The aggregate of indirect material costs, indirect labor costs, and indirect expenses is termed as Overheads. The main groups into which overheads may be subdivided are as follows:
Production or Works Overheads:
Indirect expenses which are incurred in the factory and for the running of the factory. E.g.: rent, power etc.
Administration Overheads:
Indirect expenses related to management and administration of business. E.g.: office rent, lighting, telephone etc.
Selling Overheads:
Indirect expenses incurred for marketing of a commodity. E.g.: Advertisement expenses, commission to sales persons etc.
Distribution Overheads:
Indirect expenses incurred for dispatch of the goods E.g.: warehouse charges, packing(secondary) and loading charges.
