COST

 COST: It may be defined as the

monetary value of all sacrifices
made to achieve an objective (i.e. to
produce goods and services)

S.K.SONI 1
The Meaning of “Cost”?

The
The sacrifice
sacrifice
made,
made,usually
usually
measured
measured by bythe
the
resources
resourcesgiven
given
Product up,
up,to
toachieve
achieveaa
ProductCosts
Costs Period
PeriodCosts
Costs
particular
particular
The
Thecost
cost Costs
Coststhat
thatare
are
assigned purpose.
purpose.
assignedto to identified
identifiedwith
with
goods
goodsthatthatwere
were the
theperiod
periodin
in
either
eitherpurchased
purchased which
whichthey
theyare
are
or
ormanufactured
manufactured incurred.
incurred.
for
forresale.
resale.

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COSTING
 Costing is simply cost finding.
 It may be defined as “the technique and
processes of ascertaining costs”.
 “Costing is classifying, recording and
appropriate allocation of expenditure for
the cost determination of the product or
services”

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ELEMENTS OF COST

There
There are
are 33 major
major elements
elements of
of costs:
costs:

Labour
Labour Expenses
Materials
Materials Expenses
The
Thecost
costof
of
commodities
commodities Cost
Costother
other than
than
paying
payingemployees
employees
supplied
suppliedto
to material
material&&
includes
includessalaries,
salaries,
undertaking.
undertaking. labour
labour
bonus,
bonus,etc.
etc.

S.K.SONI 4
ELEMENTS OF COST
There are 3 major
elements of costs

MATERIAL LABOUR EXPENSES

Direct Indirect Direct Direct Direct Indirect

Material Material Labour Labour Expenses Expenses

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MATERIAL
Cost of commodities supplied to an undertaking.

 DIRECT MATERIAL:
Generally becomes a part of finished product.
e.g. fibre, for spinning Mill, sugarcane for sugar
factory.
 INDIRECT MATERIAL:
Necessary in production process but not
become integral part of product.
e.g. Oil, Grease, sand paper,

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LABOUR
Cost of remuneration (expenses on wages) includes salaries,
bonuses
 DIRECT LABOUR
Wages paid to employees engage in converting raw
material into finished product.
e.g. sider,
 INDIRECT LABOUR
Wages paid to employees those who are not engage
in production process.
e.g. Security Guards.

S.K.SONI 7
EXPENSES
All the cost other than material and labour are termed as
expenses.
 DIRECT EXPENSES

Expenses which are specifically incurred on particular

job/product.
e.g. Power, design cost, etc.

 INDIRECT EXPENSES
All the indirect cost other than indirect material and
indirect labour are termed as indirect expenses.
e.g. Telephone bill, Rent, Insurance, etc.

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PRIME COST

PRIME COST

DIRECT DIRECT DIRECT

MATERIAL LABOUR EXPENSES

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OVERHEADS

OVERHEADS

INDIRECT INDIRECT INDIRECT

MATERIAL LABOUR EXPENSES

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OVERHEADS

OVERHEADS

PRODUCTION OFFICE & ADMN. SELLING & DIST.

OVERHEAD OVERHEAD OVERHEAD

S.K.SONI 11
 TOTAL COST
PRIME COST

OVERHEADS

Direct Material
Indirect Material

Direct Labour
Indirect Labour

Direct Expenses Indirect Expenses

S.K.SONI 12
Manufacturing Companies

Prime
Prime Costs
Costs include:
include:

Direct
Direct Direct
Direct Direct
Direct
Materials
Materials Labor
Labor Expenses
Expenses

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Manufacturing Companies

Factory
Factory Costs
Costs include:
include:

Direct
Direct Direct
Direct Direct
Direct
Materials
Materials Labor
Labor Expenses
Expenses

+
Production
Overhead

S.K.SONI 14
Manufacturing Companies

Cost
Cost of
of Production
Production include:
include:

Direct
Direct Direct Direct
Direct
Direct
Materials
Materials Labor
Labor Expenses
Expenses
+
Production
Overhead

+
Office & Admn.
Overheads

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Manufacturing Companies

Cost
Cost of
of sales
sales include:
include:

COST SELLING
SELLING&&DIST.
DIST.
COST OF
OF PROD
PROD + OVERHEADS
OVERHEADS

S.K.SONI 16
 Materials
Materials Labour
Labour Expenses
Expenses

direct
directlabor
labor Indirect
Indirectlabor
labor

Indirect
Indirect
direct
directmaterial
material direct
material
material directexp
exp Indirect
Indirectexp
exp

S.K.SONI 17