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Elements of Cost Sheet

Elements of Cost Sheet

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03/18/2014

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Lesson-13Elements of Cost and Cost SheetLearning Objectives
To understand the elements of cost
To classify overheads on different bases
To prepare a cost sheet
Elements of Cost
Raw materials are converted into finished products by a manufacturing concern with the helpof labor, plants etc. The elements that constitute the cost of manufacturing are known aselements of cost. The elements of cost include the following:
Material
Labor 
ExpensesEach of these elements is again subdivided into direct and indirect material.Direct material, direct labor and direct expenses are those which can be traced in relationshipwith a particular process, job, operation or product. Indirect material, indirect labor andindirect expenses are those which are of general nature and cannot be traced in relationshipwith a particular process, operation, job or product.Direct materialDirect labor together constitute prime costDirect expensesIndirect materialIndirect labor of the factory together constitute factory (or works)Indirect expensesPrime cost + Factory (or works) overhead = Factory cost or works costFactory cost + Administration overhead = Cost of productionCost of production + Selling and distribution overhead = Total cost or cost of salesWhile working out the cost of sales, following details are to be kept in mind:Opening stock of raw materialAdd: Purchasing of raw materialsLess: Return to suppliersLess: abnormal loss of materialsRs.************Rs.
 
 Less: Closing stock of raw materialsRaw material consumedDirect wagesDirect expensesPrime costFactory overhead expensesAdd: Opening work in processLess: sales of scrapsLess: closing work in processFactory cost or works costOffice and administration overheadCost of productionAdd: Opening finished stock Less: closing finished stock Cost of production of goods soldSelling overheadDistribution overheadTotal cost or cost of salesProfitSelling price
Key TermsDirect Material
Direct material is the material which can be conveniently identified with or allocated to costcenters and cost units. It refers to the material out of which a product is manufactured. For example, leather shoes are produced out of leather, butter is produced out of milk, steelutensils are produced out of stainless steel and so on. Thus, leather, milk and stainless steelare the direct materials for the manufacture of shoes, butter and steel utensils respectively.Like direct material, another kind of material may be required for manufacturing but notdirectly. For example, machines used for production require lubricants, jute and cotton wastesetc. which are indirect materials.Direct material is a component of prime cost and indirect material is a component of factoryoverhead. Direct material directly varies with the output whereas indirect material does notso.
Direct Wages
Direct wages are the wages which can be conveniently identified with or allocated to costcenters and cost units. It refers to the wages paid to the workers who actually produce goods.In case of manual work, it is not difficult to locate direct worker because he is the one who produces goods. In case of the work done by a machine, the person who collects input and
 
output and in whose account the output is credited for the purpose of payment of wages isdirect worker.There are several other workers in a factory who help direct workers in connection with their work with regard to supply of materials, power etc. and in respect of supervision andmaintenance. These are indirect workers and wages of indirect workers at different stages of  production are indirect wages. Direct wage is a component of prime cost whereas indirectwage is a component of factory overhead. The former directly varies with the output whereasthe latter may not vary so.
Direct Expenses
Besides direct material and direct layout, certain expenses may be wholly and exclusivelynecessary for a particular production. This expense is referred as direct expense and it can beeasily identified with or allocated to cost centers or cost units. For example, if an order isreceived, a manufacturer will have to prepare a mould exclusively for this purpose. The costof the mould may be regarded as direct expense of the production. Similarly, the charge for hiring a special plant for production is also direct expense and it can be easily identified withand allocated to cost centers or cost units. The cost of preparing blue print for a production isanother example of direct expense.
Overhead
Overhead is an indirect expense incurred at various levels of activities of an enterprise. Theseexpenses cannot be conveniently identified with or allocated to cost centers or cost units.According to functions, classification of overhead expenses may be done as follows:
(i) Factory or Works Overhead
Factory or works overhead refers to all indirect expenses of a factory. It includesthe following:
Wages of all factory staff excluding those of direct workers
Indirect material
Rent
Rates
Taxes of factory
Depreciation of factory assets
Excise duty
Canteen expenses
Labor welfare expenses
(ii) Administration Overhead
It refers to all the expenses incurred in connection with general administration. Inadministrative building, following things are included:
Salary of administrative staff 
Rent

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