INTRODUCTION

What is Cost?
The term cost refers to the resources sacrificed or forgone to

achieve a specific objective. It represents the expenditure which

has been made or incurred for an economic benefit. There can be three situations regarding this benefit:

Benefit may have already been received

Benefit yet to be received Possibility of benefit receiving may have been lost.

COST

DIRECT

INDIRECT

Benefits of Differentiating Costs

More accurate forecasting

Reduced overspending
Understanding trade-offs

Learning the true cost of projects/activities

Pricing

Meaning of Direct Expenses

Chargeable Expenses

Conveniently allocated to a cost Unit

Directly incurred for a specific product or

saleable service.

Classification of Direct Expenses

Direct Labor Direct Material

Direct Expenses
Prime Cost = Direct Material + Direct

Labor + Direct Expenses

Examples of Direct Expenses

Purchase Price of Goods

Carriage on Goods purchased

Wages on Goods Insurance of Goods in Transit Custom Duty Freight

Diff between indirect and direct expenses

Direct costs are costs that can easily be

traced to a specific project or activity.

Indirect costs are costs that can not be

easily traced to a specific project or activity.

How to control Direct Expenses?

How to control Labor? 1. Manpower requirement 2. Time and motion study 3. Control over idle time and overtime 4. Control over labor turnover

Contd..
How to control Material? 1. Proper quality with proper price 2. Purchase at competitive price 3. Continuous supply 4. Equlibrium in stock of material

5. Reduce wastage and losses

Contd..
How to control expenses? 1. Fix a standard Cost 2. Variances should be identified 3. Reduce variations to minimum 4. Revise if necessary standards for

direct expenses.

CASE STUDY

APPLE IPAD- Material Cost

Labour Cost
The expense for the company to produce the

product with human effort

For an I pad 2 the labor cost is around 8$ per unit Source: http://www.channelregister.co.uk/2012/02/15/apple_i pad_foxconn_workers_eight_dollars/