Lecture 2

Elements of Cost
ELEMENTS OF COST
 COST
Cost is the total expenditure incurred on
What is cost ?
production of goods or rendering services it can be

Notional i.e.
Actual i.e.
Imaginary cost /
Real cost
opportunity cost

E.g. Materials cost, Income forgone to taking

another option
wages, salary etc. E.g. Notional rent
 Elements
of Cost

Material Expenses
Labour

Direct Indirect Direct Indirect Direct Indirect

Material Material Labour Labour Expense Expense

Prime cost Overheads

 Direct Material Cost Indirect Material Cost

Form part of the finished Do not form part of the

product finished product

Directly charged to the Cost cannot be allocated

products directly but which can be
apportioned to or absorbed

E.g. Timber in furniture E.g. Lubricants & cotton

making, cloth in dress waste used in maintenance of
making machinery
 Direct Labour Cost Indirect Labour Cost

Wages to workers who are Wages to workers who are

directly involved in the not directly involved in the
finished goods finished goods

Directly charged to the Cost cannot be allocated

products directly but which can be
apportioned to or absorbed

E.g. Wages of Factory E.g. Salary of office

workers employees
 Direct Expenses Indirect Expenses

Expenses directly relating to Expenses not directly

manufacture of a product or relating to production of a
rendering a service product or service

Directly charged to the Cost cannot be allocated

products directly but which can be
apportioned to or absorbed

E.g. Royalty paid, hire E.g. Office expenses, Selling

charges paid expenses
 Elements
of Cost

Material Expenses
Labour

Direct Indirect Direct Indirect Direct Indirect

Material Material Labour Labour Expense Expense

Prime cost Overheads

All the best