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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