Management

Accounting
for Managers

Part 1.2 Element of Cost

By
Dr.Kundan Patel
GUNI-FMS-VMPCMS
TOPICS

•Element of Cost
•Classifications
•Cost sheet
Element of
Cost
 Material
Direct Material
• The cost of Material entering into and
becoming constituent part of a Product or
saleable Services (Cotton in textile, Leather in
shoes)

Indirect Material
• Material cost other than Direct Material
cost (Paper in polishing, Nails in furniture)
 Labour
Direct Labour
• The cost of remuneration for employees’
efforts and skills applied directly to a
Product or saleable Service

Indirect Labour
• Wage cost other than Direct Wages cost.
 Expenses
Direct Expenses
• Cost other than material or wages incurred
for a specific product or saleable Service
(cost of Specific patents, Royalty)
Indirect Expenses
• Expenses other than direct expenses
(Depreciation, Repairs & Maintenance)
Indirect Cost = Overhead (O/h)
 Classification of Overhead
• Based on Function
– Factory Overheads
– Office and Administrative Overheads
– Selling and Distribution Overheads
 Other Classification
• Based on Behavior
– Fixed Cost
– Variable Cost
– Semi – Variable Cost
 based on Decision Making/
Charecteristics
• Relevant / Irrelevant cost
• Opportunity cost
• Sunk cost
• Incremental cost
• Variable cost / Fixed cost
• Marginal cost / Differential cost
 Components of Total cost

Direct Material Prime Cost

+ Direct Labour Or Basic
+ Direct Expenses Cost

Prime Cost Factory Cost

+ Factory Or
Overheads Production
Cost

Cost of
Factory Cost Production
+Office Overheads Or Office
Cost Cont…
 Cont..

Cost Of
Total Cost
Production
Or Cost Of
+ Selling &
Sales
Distribution O/h

Cost Of Sales Sales

+ Profit / Loss