Elements of Cost in Cost Accounting with Example

What are the Elements of Cost in Cost Accounting?

The elements that constitute the cost of manufacture are known as the elements of cost. Such element of cost is divided into three categories. In a manufacturing concern, raw materials are converted into a finished product with the help of labour and other service units. They are Material, Labour and Expenses.

Elements of Cost in Cost Accounting

Elements of Cost in Cost Accounting

Again, these elements of cost are divided into two categories such as Direct Material and Indirect Material, Direct Labour and Indirect Labour, Direct Expenses and Indirect Expenses. All direct material, direct labour and direct expenses are added to get prime cost. Likewise all indirect material, indirect labour and indirect expenses are added to get overhead. Again, overhead is divided into four categories. They are factory overhead, administration overhead, selling overhead and distribution overhead.

1. Direct Material: It refers to material out of which a product is to be produced or manufactured. The cost of direct material is varying according to the level of output. For example: Milk is the direct material of butter.

2. Indirect Material: It refers to material required to produce a product but not directly and does not form a part of a finished product. For example: Nails are used in furniture. The cost of indirect material is not varying in direct proportion of product.

3. Direct Labour: It refers to the amount paid to the workers who are directly engaged in the production of goods. It varies directly with the output.

4. Indirect Labour: It refers to the amount paid to the workers who are indirectly engaged in the production of goods. It does not vary directly with the output.

5. Direct Expenses: It refers to the expenses that are specifically incurred by the company to produce a product. A product cannot be produced without incurring such expenses. It varies directly with the level of output.

6. Indirect Expenses: It refers to the expenses that are incurred by the organization to produce a product. But, these expenses cannot be easily found out accurately. For example: Power used for production.

7. Overhead: It is the combination of all indirect materials, indirect labour and indirect expenses.

8. Factory Overhead: It is otherwise called Production Overhead or Works Overhead. It refers to the expenses that are incurred in the production place or within factory premises. For example: Indirect material, rent, rates and taxes of factory, canteen expenses etc.

9. Administration Overhead: It is otherwise called Office Overhead. It refers to the expenses that are incurred in connection with the general administration of the company. For example: Salary of administrative staff, postage, telegram and telephone, stationery etc.

10. Selling Overhead: It refers to all expenses incurred in connection with sales. For example: Salary of sales department staff, travelers’ commission, advertisement etc.

11. Distribution Overhead: It refers to all expenses incurred in connection with the delivery or distribution of goods and services from the producer to the consumer. For example: Delivery van expenses. loading and unloading, customs duty, salary of deliverymen etc.