CHAPTER-4

MANUFACTURING COST ELEMENTS

AND COST ESTIMATION FOR
VARIOUS PROCESS

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 COST CONCEPTS
 Cost refers the amount of expenses spent to generate
product or services.
 Cost refers expenditure that may be actual or nominal
expenses incurred to generate output.
 Cost is the value of economic resources used as result of
producing or doing the things.
 In general, cost-means the amount of expenditure incurred
on, or attributable to a given thing
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 MANUFACTURING COSTS
 Manufacturing costs are those costs that are directly
involved in manufacturing of products and services.
 Examples of manufacturing costs include:
 Raw materials costs and
 Salary of labor workers
 Manufacturing cost is divided into three broad categories by
most companies.

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 CONT’….
 Sum of all the expenditures for the inputs of the system (i.e.
purchased components, energy, raw materials, etc.) and for
disposal of the wastes produced by the system.

Direct Materials Cost

 The materials that go into final product are called raw
materials.
 Actually raw materials refer to any materials that are used in
the final product; and the finished product of one company can
become raw material of another company.
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 DIRECT LABOR COST

 The term direct labor is reserved for those labor costs that can be
essentially traced to individual units of products.
 The labor cost of assembly line workers, for example, is a direct
labor cost, as would the labor cost of carpenter, bricklayer and
machine operator.
 Direct labor is sometime called touch labor, since direct labor
workers typically touch the product while it is being made.

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 CONT’…
 Prime Cost = Direct Materials Cost + Direct Labor Cost.

Manufacturing Overhead Cost

 Manufacturing overhead, the third element of manufacturing
cost, includes all costs of manufacturing Except direct material
and direct labor.
 Examples of manufacturing overhead include items such as
indirect material, indirect labor, maintenance and repairs on
production equipment and heat and light, property taxes,
depreciation, and insurance on manufacturing facilities.
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CONT’…
Indirect material
 The material which is used for purposes ancillary to the business and
which cannot be conveniently assigned to specific physical units is
termed as indirect material.
 Indirect material may be used in the factory, office or the selling and
distribution divisions.

Indirect Labor
 The labor employed for the purpose of carrying out tasks incidental to
goods produced or services provided.
 Wages of storekeepers, foremen, timekeepers, directors’ fees, salaries
of salesmen etc.
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NON-MANUFACTURING COSTS
 Non-manufacturing costs are those costs that are not incurred
to manufacture a product. Examples of such costs are salary of
sales person and advertising expenses.
 Generally non-manufacturing costs are further classified into
two categories.
Marketing and Selling Costs
 Administrative Costs

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 CONT’…
Marketing or Selling Costs
 Marketing or selling costs include all costs necessary to
secure customer orders and get the finished product into the
hands of the customers.
 These costs are often called order getting or order filling costs.
 Examples of marketing or selling costs include advertising
costs, shipping costs, sales commission and sales salary

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CONT’….
Administrative Costs:
 Administrative costs include all executive, organizational, and
clerical costs associated with general management of an
organization rather than with manufacturing, marketing, or
selling.
 Examples of administrative costs include executive
compensation, general accounting, secretarial, public
relations, and similar costs involved in the overall, general
administration of the organization as a whole.

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Estimate the Manufacturing Costs
Equipment Information Tooling

Raw Materials

Labor
Manufacturing System Finished Goods
Purchased
Components

Energy Supplies Services Waste

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CONT’…

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 Elements of the Manufacturing Cost of
a Product
Manufacturing Cost

Components Assembly Overhead

Equipment Indirect
Standard Custom Labor Support
and Tooling Allocation

Raw
Processing Tooling
Material

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 COMPONENTS OF TOTAL COST
Prime Cost
 Prime cost consists of costs of direct materials, direct labors and
direct expenses. It is also known as basic, first or flat cost.
Factory Cost
 prime cost and, works or factory overheads that include costs of
indirect materials, indirect labors and indirect expenses incurred
in a factory.

Office Cost
 sum of office and administration overheads and factory cost

as administration cost or the total cost of production.

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 CONT’….
Total Cost
 Selling and distribution overheads are added to the total cost
of production to get total cost or the cost of sales.

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 COST ESTIMATION FOR VARIOUS
PROCESS
 There are two basic systems used by manufacturers to assign
costs to their products.
 Job order costing and
 Process costing
Process costing
 The cost accounting system used by a company depends upon
the nature of its products or services.

 Process costing is more efficient for companies that produce

large quantities of homogenous product in a continuous

process.
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 JOB ORDER COSTING

 Job-order costing allocates costs to products that are identified

by individual units or batches.
 It is used by a manufacturer who produces products as
individual units or in distinct batches or jobs.

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 THANK YOU

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