RAHUL VERMA

PROJECT NAME: ELEMENTS OF COST

BBA-IB
ASM COLLEGE OF COMMERCE , SCIENCE & INFORMATION TECHNOLOGY,
PIMPRI,PUNE-411019
The Meaning of “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)

 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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 DEFINATION OF ELEMENTS OF COST

The elements of cost are the factors on the basis of which expenditure is incurred.
It may be defined as a group name of smaller costs of identical nature. Elements
of cost make the analysis of the cost easy and facilitate maximum information
regarding costs to the manufacturers
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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,

RAHUL VERMA 6
 DIFFERENCE
DIRECT MATERIAL COST
Direct material cost is the cost of
those materials that can be easily
identifiable in the finished product.
Example:
►Cost of leather in shoes. ►Cost of glass in mirror.
INDIRECT MATERIAL COST
Indirect Material Cost is the cost which is not directly
attributable to the finished product. These costs are not
absorbed or apportioned by the cost units or cost centers
directly.
Example
Fuel or electricity needed for geneCrating power.
Materials consumed for repair work.
 LABOUR COST

DEFINATION

Labor cost refers to the cost of remuneration of the workers employed in an organization. It includes the
amount of wages, salaries, perquisites, allowances etc.

Example:

►Salary paid to workmen ►Commission paid to agents

 DIFFEFENCE

DIRECT LABOUR COST INDIRECT LABOUR COST

These are also known as direct wages. This
cost can be identified with and allocated to cost
centers or cost units.
Example:
►Wages paid for spinning yarn in a spinning
mill.
►Wages paid to the driver and conductor of a
bus.
These are also known as indirect wages. It refers to that
part of labor cost which is not directly attributable to the
cost centers or cost units.
Example:
Salary paid to the manager, Salary paid to the guard of
the office.
 EXPENSES

DEFINATION

Expenses refer to the cost of services provided to an

undertaking and the notional costs of the use of the assets
owned by the business house.

Example: Deprecation on building, plant

 DIFFERENCE

DIRECT EXPENSES INDIRECT EXPENSES (OVERHEADS)

These expenses are also called chargeable ► Expenses which cannot be allocated to the
expenses. These expenses can be directly cost centers or units but can be apportioned by
identified to the cost centers or cost units. them are known as overheads or indirect
expenses.
Example: ► Example:
► Carriage and freight paid on direct ► Rent, rates and taxes
materials purchased.
► Repairs to machinery
► Import duty ► Factory lighting
► Office lighting
► Depreciation and insurance of
 FACTORY
OVERHEADS
OFFICE AND SELLING AND
ADMINISTRATIVE DISTRIBUTION
OVERHEADS OVERHEADS

OVERHEADS
 OVERHEADS

OVERHEADS It includes all the indirect costs incurred in factory in respect

of manufacturing operations.
Example: Cost of lubricating oil, coal, gas and fuel, etc.

It includes all the indirect costs relating to direction,

OFFICE AND
ADMINISTRATION guidance, management, control and administration of
OVERHEADS business concern.
Example: Salary of general manager, insurance expenses,
etc.

These include all indirect costs which are incurred for

SELLING Promoting the sales, Retaining the customers, Providing
&DISTRIBUTION after sale services to the consumers
OVERHEADS Example: advertisement, salary of sales manager etc.