Elements of Cost

 

Unit -2

Elements of cost

 

       Direct Material

Direct materials are those which can be identified in the product and can be measured. They can also be charged to the products directly. Thus direct materials directly enter the product and they form part of the finished product.  Eg. Cloth in a garment, Leather in shoe-making, timber in furniture, fruits in the food processing industry.

Indirect Material

Indirect materials are those materials that do not form a part of the finished product. It is defined as “materials which cannot be allocated, but which can be apportioned to or absorbed by cost centers or cost units. For example, lubricants oils, cotton wastes, small tools, etc. but sometimes the cost of small items like the nail in furniture or thread in the dress manufacturing are treated as indirect material though they go directly into production.

Direct Wages

Direct labor is that labor can be easily identified with and allocated directly to a particular job, product, process, e.g wages paid to workers working on a machine that manufactures toys. Thus direct labor is utilized for converting the raw materials into a finished product.  The wages paid to such workers are known as direct wages.

Indirect Wages

The wages which cannot be charged directly to production are known as indirect wages. Thus the wages which cannot be allocated but which can be apportioned to or absorbed by cost centers or cost units is known as indirect labor. Example- salaries and wages to foremen, supervisors, charge men, inspectors, maintenance workers clerical staff working in the production department, overtime, and night shift allowance paid.  

Direct Expenses

Direct expenses include all types of expenses other than direct materials, direct labor, which are incurred specifically for a particular product or process. Direct expenses form a part of the Prime Cost.

Examples-

Cost of drawings and patterns

Repairs and maintenance of plants and machinery

Architect’s fees

 Research fees or expenditure

Excise duty paid

Royalty paid

Indirect Expenses

The expenses which are neither indirect material nor indirect labor are known as indirect expenses. These expenses are not charged directly to production.

Examples –

Rent, rates, taxes, salary to staff, general manager salary, canteen expenses, telephone expenses, lighting expenses, power fuel

 

Overheads

Definition - ICMA defines overhead as ‘total of indirect material, indirect wages and indirect expenses.

1) Factory Overhead – factory overhead includes all overhead the cost incurred from the stage of procurement of material till the completion of the finished product but excludes the expenses on administration, selling and distribution.

Rent, rates, and dep. of factory building

Insurance of factory building

Salary of foremen, time-keeper, works manager

Fuel, power, coal

 Facto y lighting heating,

Welfare expenses, canteen exp, telephone charges of factory

2) Administrative Overheads

This overhead includes the expenses of managerial functions of direction, planning, and controlling the operation of business, other than selling and distribution, research, and development.

For example- office rent, office salary

Printing and stationery, lighting, telephone charges of office

Audit fees

Director’s fees

Legal expenses

Bank charges 

3) Selling and Distribution

Selling expenses include the expenses in promoting sales and retaining customers

Advertisement, market research

Salaries and commission of salesman and selling agents

Traveling expenses of salespeople

Salary, telephone, printing and stationary of the sales department

Cost of free samples

4) Distribution Overhead

The expenses related to the delivery of sold goods to customers fall under this group –

Cost of secondary packing

Carriage outward and transport charges

Warehouse rent, depreciation of warehouse and repairs

Salary of warehouse staff

Repairing of empties

Expenses of warehouse van, trucks, etc.

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