Elements of Cost
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Elements of Cost

Elements of Cost Profit or loss is the difference between total cost and total revenue of business. Therefore, a clear understanding of costs and revenues is necessary for profit planning and control. Concept of Cost The term 'cost' generally means the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing. Its interpretation depends upon: • The nature of the business or industry. • The circumstance in which it is used. In a business where selling and distribution expenses are quite nominal, the cost of the product may be determined without taking into account the selling and distribution overheads. On the other hand, in a business or industry where selling and distribution expenses are very high, cost cannot be calculated accurately without considering selling and distribution overheads.

Elements of Cost

Profit or loss is the difference between total cost and total revenue of business. Therefore, a clear understanding of costs and revenues is necessary for profit planning and control.

Concept of Cost

The term 'cost' generally means the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing. Its interpretation depends upon:

• The nature of the business or industry.

• The circumstance in which it is used.

In a business where selling and distribution expenses are quite nominal, the cost of the product may be determined without taking into account the selling and distribution overheads. On the other hand, in a business or industry where selling and distribution expenses are very high, cost cannot be calculated accurately without considering selling and distribution overheads.

The context in which the term 'cost' is used is also important. For example, to the producer 'cost' may mean the cost of producing an article, whereas for the consumer 'cost' means the price which he pays for the article. The cost to the producer may be factory cost, office cost or cost of sales. Money spent on materials is called the cost of materials, whereas the money spent on labor is known as cost of labor.

ELEMENTS OF COST

There are three broad elements of cost.

1. Materials: The substance from which a product is made is known as material. It may be in or a manufactured state. Cotton used in manufacturing cloth, sugarcane used in producing sugar, rubber and leather used for producing shoes are examples of materials. Material can be direct as well as indirect.

2. Labor: Labor means the human effort required for converting materials into finished goods.

3. Expenses: Expenses may be straight or indirect.

4. Overheads: The term 'overhead' includes indirect material, indirect labor and indirect expenses. In other words, all indirect costs are overheads. These may be incurred in the factory or office or on selling and distribution. Thus, overheads are of three types :

Factory overheads:

These include:

(a) Indirect material used in the factory such as lubricants, oil, consumable stores, etc.

(b) Indirect labor such as gatekeeper's salary, timekeeper's salary, works manager's salary, etc

(c) Indirect expenses such as factory rent, factory insurance, factory lighting, etc.

Office and administrative overheads:

These include:

(a) Indirect material used in the office such as printing and stationery material, brooms and dusters, etc.

(b) Indirect labor such as salaries payable to office manager, office accountant, clerks, etc

(c) Indirect office expenses such as rent, insurance, office lighting, etc.

Selling and distribution overheads:

These include:

(a) Indirect materials such as packing material, printing and stationery material used for selling and distribution, etc.

(b) Indirect labor such as salaries of sales manager and salesmen.

(c) Indirect expenses such as rent, and insurance of sales office, advertising expenses, etc

 

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