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What are the various elements of costs?
There are three elements of cost:
- Material Cost: This is the cost of material or the commodity used by the organisation for its production purpose. Material is the substance, from which a product is made. Thus, it may be in a raw or a manufactured state. It can be direct or indirect.
- Direct Material Cost forms an integral part of the finished product and is identified with the individual cost centre. It is also described as process material, stores material, production material, etc. Example: Raw materials purchased or purchased primary packing material, etc.
- Indirect Material Cost is used for ancillary purposes of the business and cannot be conveniently identified with the individual cost centre. Example: Consumable stores, oil and waste, printing and stationery material etc.
- Labour Cost: This is the cost, incurred in the form of remuneration paid to the employees or labours of the organisation. The workforce required to convert material into finished product is called labour. It can be direct or indirect.
- Direct Labour Cost is the cost incurred on those employees who directly take part in the manufacturing process and easily identified with the individual cost centre.
- Indirect Labour Cost is the cost incurred on those employees who do not directly take part in the manufacturing process and cannot identified with the individual cost centre. Example: salary of foreman, salesmen, director’s salary, etc.
- Expenses: are the costs of services provided to the organisation. It can be direct or indirect.
- Direct Expenses are the expenses which can be directly identified with the individual cost centres. Example: hire charges of machinery, cost of defective work for a particular job or contract etc.
- Indirect Expenses are the expenses which cannot be directly identified with the individual cost centres. Example: rent, lighting, telephone expenses, etc.
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