Elements of Cost
There are broad elements of cost:
The substance from which the product is made is known as material. It may be in a raw or a manufactured state. It can be direct as well as indirect.
Direct material: All material which becomes an inertial part of the finished product and which can be conveniently assigned to specific physical units is termed as “Direct Material”. Following are some of the examples of direct material:
(i) All material or components specifically purchased, produced or requisitioned from stores.
(ii) Primary packing material (e.g. cartoon, wrapping, cardboard, boxes, etc.)
(iii) Purchased or partly produced components.
For conversion of materials into finished goods, human effort is needed. Such human effort is called labour. Labour can be direct as well as indirect.
Direct labour: Labour which takes an active and direct part in the production of a particular commodity is called direct labour. Direct labour costs are, therefore, especially and conveniently traceable to specific products.
Indirect labour: Labour employed for the purpose of carrying out tasks incidental to goods or services provided, is indirect labour. Such labour does not alter the construction composition or condition of the product. It cannot be practically traced to specific units of output.
Expenses may be direct or indirect.
Direct expenses: These are expense which can be directly, conveniently and wholly allocated to specific cost centres or cost units. Examples of such expenses are: hire or some special machinery required for a particular contract, cost of defective work incurred in connection with a particular job or contract etc.
Indirect expense: These are expenses which cannot be directly, conveniently and wholly allocated to cost centres or cost units.
It is to be noted that the term overheads has a wider meaning than the term indirect expenses. Overheads include the cost of indirect material and indirect labour besides indirect expenses.
Indirect expenses may be classified under the following categories:
(a) Manufacturing expenses: Such indirect expenses which are incurred in the factory and concerned with the running of the factory or plant are known as manufacturing expenses. Expenses relating to production management and administration are included therein. Following are a few items of such expenses:
Rent, rates and insurance of the factory premises, power used in factory building, plant and machinery, etc.
(b) Office and administrative expenses: These expenses are not related to factory but they pertain to the management and administration of business. Such expenses are incurred on the direction and control of an undertaking.
(c) Selling and distribution expenses: Expenses incurred for marketing of a commodity for securing orders for the articles, dispatching goods sold, and for making efforts to find and retain customers, are called selling and distribution expenses.
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