Financial Management & Cost Accounting

Lesson 46. MAIN ELEMENTS OF COSTS

Module 8. Costing

Lesson 46

MAIN ELEMENTS OF COSTS

46.1 Elements of Cost

There are three main elements of cost

1. Material

2. Labour

3. Expenses

1. Material Cost

It is the cost of material which is used for the production of the product. It can be Raw material, component assembly, oils, lubricant, stationary printing, packaging etc.

The material can be of two types

a. Direct Material

b. Indirect Material

Direct Material

The material (such as raw material, components etc) which can be directly identified and associated with a given product are called direct material. The direct material cost is wholly charged to the cost of the product.

Indirect Material

The materials, which do not form a part & parcel of the final product, but are necessary for running for production process & business (oil, lubricants, brooms, spares, stationary, printing materials, etc) are called indirect material. Indirect materials, are used for general purpose, and hence they can not be identified with a single product in particular. Hence, the indirect material, cost in apportioned to all product on some suitable basis Other exe – selling & promotion materials, material used in the administration department etc.

2. Labour

For conversion of raw material into finished goods & for operations of the business, various kinds of human efforts one required, these are called labour. Labour can be Direct & Indirect. The labour (e.g. Worker, Supervisor, Machinery operator etc) which is identifiable and fully associated with the production of a given product, is a direct labour cost for that product. Indirect Labour:-The labour which with a particular product / cost center is called indirect labour. e.g.: Production Manager (who looks after more than one Product), Salary & Storekeeper, salary of gate keeper, salary of administrative Staff, salary of management etc salary of salesman, etc.

3. Expenses

The costs which cannot be classified under material & labour are called expenses. Expenses are direct & indirect. Direct expenses are those expenses which can be community & wholly identified to specific product (or specific cost center) Examples: - Hire & some special equipment for production of a particular product. The rent of equipment can be fully charged to that product only (and no other product) and hence is a direct expense.

Indirect Expenses: - Are those expenses such as – Rent, insurance, lighting, etc, which can not be wholly identified & attributed to any single product or cost centre.

46.2 Overheads

All the indirect costs (Indirect material, Indirect labor, indirect expenses) are collectively called as overheads. Hence it is nothing but the aggregation of all Indirect costs.

Further overheads are classified into:

(1) Factory overheads [Indirect material, Indirect labor, indirect expenses in the factory]

(2) Office & Administration overheads [Indirect material, indirect labor, indirect expenses used in the Office & Administration.]

(3) Selling & distribution overheads [Indirect material, Indirect labor, indirect expenses used in the Selling & distribution.]

Factory overheads:-

It includes; indirect material used in the factory such as lubricants, oils, consumables stores, threads, dusters, sanitizing substances used in the factory. Indirect labor used in the factory: Gate keeper’s salary, storekeeper’s salary, work manager’s salary, general helpers, cleaners, etc. Indirect expenses used in the factory: factory rent, factory insurance, factory lighting, etc.

Office & Administration overheads :-

It includes; Indirect material used in the Office & Administration : Printing ,stationery, office furniture, brooms, etc. Indirect labour used in the Office & Administration: Salaries, payable to office managers ,accountants, etc. Indirect expenses used in the Office & Administration : Rent, insurance & lightings, taxes of office building.

Selling & distribution overheads:-

It includes; Indirect material used in the Selling & distribution overheads: Packaging, printing material, exhibition –boards, bulletins, etc. Indirect labor used in the Selling & distribution overheads: Salary of sales manager, salesmen, etc. Indirect expenses used in the Selling & distribution overheads: Rent, advertising, sales & promotion activity, etc.

So, overheads

Table 46.1 Examples of overheads

	FACTORY OVERHEADS	Office & Administration overhead	Selling & distribution overheads
Indirect material [A]	Lubricants, oils, consumables stores, threads, dusters, sanitizing substances used in the factory.	Printing ,stationery, office furniture, staplers, files, etc	Packaging, printing material, exhibition –boards, bulletins, etc.
Indirect labor [B]	Gate keeper’s salary, storekeeper’s salary, work manager’s salary, general helpers, cleaners, etc.	Salaries, payable to office managers, office staff, clerks, peons, accountants, etc.	Salary of sales manager, salesmen and other staff involved in marketing & selling activities, salary of delivery vehicles etc.
Indirect expenses [C]	factory rent, factory insurance, factory lighting, etc.	Rent, insurance & lightings, taxes of office building.	Rent, advertising, sales & promotion activity, maintenance of delivery vehicles , etc
Total overheads (A+B+C)

Table 46.2 Performa of cost sheet

Sr.no	Particulars	Amount
A.	Opening raw material
B.	Purchase
C.	Closing raw material
D.	Raw material consumed (A+B-C)
E.	Direct labour cost
F.	Direct expenses
G.	Prime cost(D+E+F)
H.	Factory overheads
I.	Opening work in process
J.	Closing work in process
K.	Factory cost(G+H+I-J)
L.	Office overheads
M.	Opening finished goods
N.	Closing finished goods
O.	Cost of production and goods sold(K+L+M-M)
P.	Selling and distribution cost
Q.	Cost of sales /Total cost(O+P)
R.	Profit(S-Q)
S.	Sales revenue

Illustration :

From the following data prepare a cost sheet. (Amount is in Rs.)

Factory Overheads 46000

Opening Raw material 15000

Add: opening Work in Process 6000

Opening Finished goods stock 30000

Selling & Distribution Overheads10000

Closing stock of Raw materials 7500

Closing Finished goods stock 27500

Purchases of raw material 225000

Direct Labour 115000

Direct Expenses 0

Office overheads 15000

	COST SHEET
	Particulars	Amount (Rs.)
A	Opening Raw material	15000
B	Add : Purchases of raw material	225000
C	Less: Closing stock of Raw materials	7500
D	RAW MATERIAL CONSUMED	232500
E	Add: Direct Labour	115000
F	Add: Direct Expenses	0
G	PRIME COST	347500
H	Add: Factory Overheads	46000
I	Add: opening Work in Process	6000
J	less: closing Work in Process	0
K	FACTORY COST	399500
L	Add: Office overheads	15000
M	Add: opening Finished goods stock	30000
N	Less: closing Finished goods stock	27500
O	COST OF PRODUCTION	417000
P	Add: Selling & Distribution Overheads	10000
Q	TOTAL COST	427000