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Classification Of Cost According to…….. 1. Nature2. Function3. Identifiably4. Behavior5. Association With Products6. Controllability7. Normality8. Time9. Relevance 10.Other Costs
Elements of costs
In order to interpret the term cost correctly and to ascertain the cost with respect to the cost centers, the cost attached with the manufacturing process may be subdivided, known as Elements of Costs.
Rights reserved by Prof. Bhagyashree Kulkarni
Elements of cost
Prime cost Overheads
Direct Direct DirectMaterial labour expenses Indirect Indirect
Indirect Material Labour Expenses
Factory Office & Selling & distributionOverheads administration overheads
o overheads
Element of cost
Cost object Cost Cost unit Cost centre Profit centre
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Cost object
It is an activity or item or operation for which a separate measurement of costs is desired
E.g. the cost of operating the personnel department of a company, the cost of a repair fob, and the cost for control
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Cost
It is the amount of expenditure incurred on a specific cost object
Total cost = quantity used * cost per unit (unit cost)
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Cost unit
It is a quantitative unit of product or service in which costs are ascertained, e.g. cost per table made, cost per metre of cloth
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Cost centre
It is a location or function of an organisation in respect of which costs are ascertained
E.g. the rent, rates and maintenance of buildings; the wages and salaries of strorekeepers
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Profit centre
It is location or function where managers are accountable for sales revenues and expenses
E.g. division of a company that is responsible for the sales of products
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Cost classification
Direct cost Indirect cost (overhead)
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Direct Costs
DefinitionDefinition: Direct costs are identifiable to a final cost objective (a particular contract). Examples: direct material and direct labor.
All costs identified specifically with a contract are direct costs for that contract and shall not be charged to another contract directly, or indirectly.
No cost shall be charged to a contract as a direct cost, if other costs incurred for the same purpose in like circumstances have been charged as an indirect cost.
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Cost that can be identified specifically with or traced to a given cost object
The direct costs consist of the following three elements:Direct materialsDirect labourDirect expenses
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Indirect Costs
DefinitionDefinition: Indirect costs are not directly identifiable with a final cost objective (e.g. a particular contract), but identified with two or more final cost objectives.
The distribution of indirect costs to various contracts should roughly be based on the benefits received on each contract.
No cost shall be charged to a contract as an indirect cost if other costs incurred for the same purpose in like circumstances have been charged as a direct cost to that contract or any other contract.
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The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Classifications of Manufacturing Costs
Manufacturing costs are oftenclassified as follows:
DirectMaterialDirect
MaterialDirectLaborDirectLabor
Manufacturing
Overhead
Manufacturing
Overhead
PrimeCost
Conversion
Cost
Classification Of Cost
According To Nature Or Elements
Materials Cost
LabourCost
Expenses
IT IS A COST OF MATERIALS
WHICH ENTER INTO & FORM PART OF PRODUCT
e.g. - timber in furniture – making
- clay in brick making
DIRECT MATERIAL COST
Direct Materials
Raw materials that become an integral part of the product and that can be conveniently traced directly to it.
Example: A radio installed in an automobile
Example: A radio installed in an automobile
Direct materials Direct materials are the raw materials
that become part of the product.
The cost of materials – the cost of materials used entering into and becoming the elements of a product or service
E.g. fabrics in garments
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INDIRECT MATERIAL COST IT IS THE COST OF MATERIAL WHICH DO
NOT FORM THE PART OF PRODUCT BUT WHICH HELP THE PRODUCTION
e.g- LUBRICATING OIL , FUEL etc.
Small items like thread, gum , nails etc
Though forms part of product but difficult to calculate cost per unit of that material
----so consider as direct material
Indirect materials
Such as stationery, consumable supplies, spare parts for machine that assist to the production of final products
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LABOUR COST
Direct Labor The definition of direct labor is pretty easy.
Direct labor represents the people who do the core work of the business. For example, if the business is a construction company, direct labor would be the people actually constructing the building. They would be the people with hammers and saws in their hands. In a retail store, direct labor would be the people helping on the sales floor doing the basic work that takes place serving the customers. In a grocery bag factory, direct labor are the people running the machines actually making the bags. I think of direct labor as the people who make or build the product.
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Labour cost
“The labour cost is the cost of remuneration of the employees of an undertaking.” such as
Wages, salaries, commissions, bonus, etc.
There are two types of labour cost are1. Direct Labour cost2. Indirect Labour cost
Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
Example: Wages paid to automobile assembly workers
Direct labour
The cost of remuneration for working time
E.g. assembly workers’ wages in toy assembly
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Indirect labour
Such as salaries of factory supervision and office staff that do not directly involve in production of the final product
If a person's labor cannot be easily linked to a specific customer's order or the person does not directly build the product, the person's labor is called "indirect labor."
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EXPENSE COST
Expenses cost
“The cost of services provided to an undertaking and the notional cost of the use of owned assets.”
Expenses are two types
1. Direct Expenses
2. Indirect Expenses
Direct expenses
Other costs which are incurred for a specific product or service
E.g. royalties
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Indirect expenses
Such as rent, rates, depreciation, maintenance expenses that do not have instant relationships with the manufacturing processes
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OVERHEADS
The definition for overhead is easy. Here it is......
If a cost is not direct labor or direct materials, the cost is overhead.
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Overheads
“The aggregate of Indirect material cost, Indirect wages and Indirect expenses”
Three types such as
1. Indirect material cost
2. Indirect labour cost
3. Indirect expenses
Manufacturing OverheadManufacturing costs that cannot be easily
traced directly to specific units produced.
Examples: Indirect materials and indirect labor
Examples: Indirect materials and indirect labor
Indirect cost (overhead) Cost that cannot be identified
specifically with or traced to a given cost object
They are identified with cost centres as overheadsIndirect materialsIndirect labourIndirect expenses
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Indirect expenses overheads1. Factory overheads
2. Office & administration overheads
3. Selling & distribution overheads
Direct Material Cost
+
Direct Labour Cost
+
Direct Expenses Cost
Indirect Material Cost+
Indirect Labour Cost+
Indirect Expenses Cost
Prime Cost
Overheads
Rights reserved by Prof. Bhagyashree Kulkarni
Assigning Costs to Cost Objects
Direct costs•Costs that can be
easily and conveniently traced to a unit of product or other cost object.
•Examples: direct material and direct labor
Indirect costs•Costs that
cannot be easily and conveniently traced to a unit of product or other cost object.
•Example: manufacturing overhead
Nonmanufacturing Costs
Administrative Costs
All executive, organizational, and
clerical costs.
Cost accumulation
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•Prime cost = direct materials + direct labour + direct expenses
•Production cost = Prime cost + factory overheadOR
= Direct materials + Conversion cost*Conversion cost is the production cost of converting raw materials into finished product
•Total cost = Prime cost + Overheads (admin, selling,distribution cost)OR
= Production cost + period cost (administrative, selling, distribution and finance cost)
•Period cost is treated as expenses and matched against sales for calculating profit, e.g. office rental
Major Cost Elements
Direct Labor Cost Labor Categories Labor Rates Labor Hours
Direct Material Cost The Actual Materials
○ Raw material○ Purchased parts and/or
assemblies Subcontracts Miscellaneous material Discounts, Scrap,
Inventory Shrinkage, & Freight-in
Indirect Costs Material Handling Fringe Benefits Overhead (or burden) G&A Expenses
Other Direct Costs Nonrecurring costs Subcontracts Travel
Profit or Fee Cost of Money EscalationEscalation
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