The elements of cost are those elements that constitute the cost of the manufacture of a product. We can broadly divide these elements of cost into three categories. In a manufacturing organization, we convert raw materials into a finished product with the help of labor and other services. These services are Material, Labour, and Expenses.
Elements of Cost
- Direct Material: It represents the raw material or goods necessary to produce or manufacture a product. The cost of direct material varies according to the level of output. For example, Milk is the direct material of ghee.
- Indirect Material: It refers to the material which we require to produce a product but is not directly identifiable. It does not form a part of a finished product. For example, the use of nails to make a table. The cost of indirect material does not vary in the direct proportion of the product.
- Direct Labour: They directly engaged in the production of goods. It varies directly with the level of output.
- Indirect Labour: Indirect labor is indirectly engaged in the production of goods. It does not vary directly with the level of output.
- Direct Expenses: It refers to the expenses that are specifically incurred by the enterprises to produce a product. The production cannot take place without incurring these expenses. It varies directly with the level of production.
- Indirect Expenses: It represents the expenses that are incurred by the organization to produce a product. These expenses cannot be easily identified accurately. For example, Power expenses for the production of pens.
- Overhead: It refers to all indirect materials, indirect labor, or indirect expenses.
- Factory Overhead: It is otherwise called Production Overhead or Works Overhead. It refers to the expenses that are incurred in the production place or within factory premises. For example Indirect material, rent, rates and taxes of factory, canteen expenses, etc.
- Administration Overhead: It is otherwise called Office Overhead. It refers to the expenses that are incurred in connection with the general administration of the company. For example Salary of administrative staff, postage, telegram, telephone, stationery, etc.
- Selling Overhead: All expenses that a firm incurs in connection with sales are selling overheads. Salary of sales department staff, travelers’ commission, advertisement, etc. are examples of selling overhead.
- Distribution Overhead: It refers to all expenses incurred in connection with the delivery or distribution of goods and services from the producer to the consumer. For example Delivery van expenses. loading and unloading, customs duty, the salary of deliverymen, etc.