Elements of Costs
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Elements of Costs

Elements of Costs The classification is based on the natural characteristics of cost i.e., on the basis of the elements of cost namely as: A.) Material cost B.) Labour cost C.) Expenses Materials are substances from which products are manufactured. Materials may be classified as direct and indirect. Direct materials are those substances which can be directly identified with any cost centre, product or a group of products.

Elements of Costs

The classification is based on the natural characteristics of cost i.e., on the basis of the elements of cost namely as: A.) Material cost B.) Labour cost C.) Expenses

Materials are substances from which products are manufactured. Materials may be classified as direct and indirect. Direct materials are those substances which can be directly identified with any cost centre, product or a group of products. Direct materials refer to those raw materials which become an integral part of the finished product. They can conveniently and economically be traced in specific units of output. As for e.g., Steel and Aluminum are the direct materials that are used for making an automobile body or raw cotton for making textiles etc. Direct materials are also known as process materials, prime cost material, production material, store materials etc. In ascertaining the cost of materials used for production purpose the following expenses should be added to their invoice price:

a.)    Import duties.

b.)    Dock charges.

c.)     Carriage inward

d.)    Storing of materials

Cost of purchasing and receiving materials and cost of rectifying materials.

How to calculate the raw materials consume?

Opening stock of raw materials                                                                           xxx

Add:

  •          Purchase of cost of raw material                                                                 xxx
  •          Carriage of inward/ carriage on raw material                                               xxx
  •          Dock charges                                                                                             xxx
  •          Import duty                                                                                               xxx
  •          Insurance of Raw material                                                                          xxx
  •          Primary packing of raw materials                                                                xxx
  •          Cost of rectifying raw materials                                                                  xxx

   Less:

  •                   Closing stock of raw material                                                              xxx
  •                   Raw materials return                                                                         xxx
  •                   Abnormal loss of raw materials                                                          xxx
  •                   Raw materials transferred to other jobs                                              xxx
  •                   Raw materials consumed                                                                   xxx

                Direct labour: Labour is defined as human effort by the application of which utility is created. Direct labour refers to direct wages paid to the workers both skilled and unskilled who are directly connected with production. The term direct wages refers to the remuneration paid to the workers who are directly connected with production. Direct wages may be defined as the major of direct labor in terms of money: Wages paid to the machine man, Workers working in the productive departments, workers of the assembly section, machine of erators. Direct labor is also known as process labor, operating labor, productive labor.

Direct expenses:

It refers to any expenses other than direct materials and direct labor which is incurred on a specific cost unit. This type of expenses can be easily identified with cost units; direct expenses are known as chargeable expenses and are charged directly to the product. As for e.g.,

a.)    Cost of special layout, design and drawings.

b.)    Hire charges of tools and equipments for a particular production

c.)     Maintenance cost of such equipments.

Overhead:

It may be defined as total cost of indirect material, indirect wages and other indirect expenses that are associated with manufacturing process. Overhead also includes cost of services. It comprises all expenses which cannot be traced or identified with the finished goods but are incurred for carrying on production process and in connection operation of the business.

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Comments (1)

very educational. thanks for sharing.

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