Elements of Cost

Elements of Cost 🧱

Costs in manufacturing and service industries are categorized into three primary elements: Material, Labour, and Expenses. These are further classified as either direct or indirect.

Material

Material refers to the basic substances used to produce goods.

• Direct Material: These materials directly contribute to and are easily identifiable in the finished product.

  • Examples: Cloth in shirts, paper in books, wood in furniture.

• Indirect Material: These are ancillary materials that support the production process but cannot be conveniently assigned to specific products.

  • Examples: Printing ink, scissors used for cutting cloth, nails used in furniture.

Labour

Labour is the human effort required to convert materials into finished goods.

• Direct Labour: This includes workers who take an active and direct part in the production process. Their effort can be directly correlated to specific products.

  • Examples: Workers operating machinery, assembly line workers, carpenters.

• Indirect Labour: This involves employees who do not directly participate in production, so their costs cannot be identified with individual products.

  • Examples: Salaries of foremen, wages of maintenance staff, administrative personnel salaries.

Expenses

Expenses are costs other than material or labour incurred during production.

• Direct Expenses: These are expenses that can be directly and wholly allocated to a specific job or project. They are also known as chargeable expenses.

  • Example: Cost of hiring special equipment for a specific job.

• Indirect Expenses: These are all other expenses not classified as direct. They support overall operations.

  • Examples: Utility costs, depreciation, administrative expenses.

Overheads 🏭

Overheads is a collective term for all indirect costs, including indirect material, indirect labour, and indirect expenses. Overheads are commonly categorized as:

• Factory Overheads: Expenses incurred within the factory for its operation, like rent, power, and maintenance.
• Office and Administrative Overheads: Expenses related to the management and administration of the business, such as office rent and staff salaries.
• Selling and Distribution Overheads: Costs associated with marketing, sales, dispatching goods, and customer service.