Material Labor and Direct Expenses

1. ELEMENTS OF COST
COST ACCOUNTING
PROF.U.K.TEKE

2. The management of an organization needs necessary
data to analyse and classify costs for proper control
and for taking decisions for future course of action.
Hence the total cost is analysed by elements of costs
i.e. by the nature of expenses. A cost is composed of
three broad elements and they are materials, labour
and other expenses.

4. MATERIAL
THE SUBSTANCE FROM WHICH THE PRODUCT IS MADE IS KNOWN AS MATERIAL. IT MAY
BE IN A RAW OR A MANUFACTURED STATE
“THE MATERIAL COST IS THE COST OF COMMODITIES SUPPLIED TO AN UNDERTAKING”-
I.C.M.A.
MATERIALS COST IS OF TWO TYPES, VIZ.
(I) DIRECT MATERIALS COST, AND
(II) INDIRECT MATERIALS COST.

5. DIRECT MATERIAL
ALL MATERIALS, WHICH BECOMES AN INTEGRAL PART OF THE FINISHED PRODUCT AND WHICH CAN BE
CONVENIENTLY ALLOCATED TO SPECIFIC PHYSICAL UNITS IS TERMED AS DIRECT MATERIAL.
DIRECT MATERIAL COST IS “THE COST OF MATERIALS ENTERING INTO AND BECOMING CONSTITUENT
ELEMENTS OF A PRODUCT OR SALEABLE SERVICE”.
COTTON USED IN PRODUCTION OF CLOTH, LEATHER USED IN THE CASE OF PRODUCTION OF LEATHER GOODS
AND PRIMARY PACKING MATERIAL (E.G. – CARTOON, WRAPPING, CARDBOARD, BOXES.) ETC.
ETC., ARE THE EXAMPLES OF DIRECT MATERIALS. ANY MATERIALS PURCHASED AND USED FOR A SPECIFIC
JOB ARE ALSO DIRECT MATERIALS. DIRECT MATERIAL IS ALSO DESCRIBED AS RAW-MATERIAL, PROCESS
MATERIAL, PRIME MATERIAL, PRODUCTION MATERIAL, STORES MATERIAL, CONSTRUCTIONAL MATERIAL ETC.

6. INDIRECT MATERIAL
“MATERIALS USED FOR THE PRODUCT OTHER THAN THE DIRECT MATERIALS ARE
CALLED INDIRECT MATERIALS. ALL MATERIAL, WHICH IS USED FOR SECONDARY
PURPOSES AND CANNOT BE ALLOCATED CONVENIENTLY TO SPECIFIED PHYSICAL UNITS,
IS CALLED AS INDIRECT MATERIAL.
MATERIALS COST WHICH CANNOT BE IDENTIFIED WITH A SPECIFIC PRODUCT, JOB,
PROCESS IS KNOWN AS INDIRECT MATERIAL COST.
A FEW EXAMPLES ARE CONSUMABLE STORES, OIL AND WASTE, PRINTING AND
STATIONERY MATERIAL, AND ETC. INDIRECT MATERIAL MAY BE USED AT THE FACTORY,
OFFICE OR SELLING AND DISTRIBUTION DIVISIONS.

7. LABOUR
HUMAN EFFORT REQUIRED TO CONVERT MATERIALS INTO FINISHED PRODUCTS IS TERMED
AS LABOUR.
LABOUR COST IS THE REMUNERATION PAID FOR PHYSICAL OR MENTAL EFFORT EXPENDED IN
PRODUCTION AND DISTRIBUTION.
“THE LABOUR COST IS THE COST OF REMUNERATION (WAGES, SALARIES, COMMISSIONS,
BONUS, ETC.) OF THE EMPLOYEES OF AN UNDERTAKING” – I.C.M.A.
LABOUR COST IS ALSO DIVIDED INTO DIRECT AND INDIRECT PORTIONS:
(I) DIRECT LABOUR COST
(II) INDIRECT LABOUR COST

8. (I)DIRECT LABOUR COST
IT IS ALSO CALLED ‘DIRECT-WAGES’. DIRECT LABOUR COST IS THE COST OF LABOUR DIRECTLY ENGAGED
IN PRODUCTION OPERATIONS. E.G., WORKMEN ENGAGED IN ASSEMBLING PARTS, CARPENTERS
ENGAGED IN FURNITURE MAKING, ETC.DIRECT LABOUR COST CAN BE CONVENIENTLY AND SPECIFICALLY
CHARGED TO SPECIFIC PRODUCTS.
(II) INDIRECT LABOUR COST
INDIRECT LABOUR COST IS THE REMUNERATION PAID FOR LABOUR ENGAGED TO HELP THE
PRODUCTION OPERATIONS, E.G., INSPECTORS, WATCHMEN, SWEEPERS, STORE KEEPERS, ETC. THE
REMUNERATION PAID TO THESE PERSONS CANNOT BE TRACED TO A JOB, PROCESS OR PRODUCTION
ORDER. THE LABOUR COSTS OF IDLE TIME, OVERTIME, HOLIDAYS, ETC., ARE ALSO TAKEN AS INDIRECT
COSTS. SIMILARLY, CLERICAL AND MANAGERIAL STAFF, SALESMEN, DISTRIBUTION EMPLOYEES ARE ALSO
INCLUDED IN THE ORBIT OF ‘INDIRECT LABOUR’.

9. OTHER EXPENSE
EXPENDITURE OTHER THAN MATERIAL AND LABOUR IS THE THIRD ELEMENT OF
COST.
IT IS DEFINED BY I.C.M.A. AS- “THE COST OF SERVICE PROVIDED TO AN
UNDERTAKING AND THE NOTIONAL COST OF THE USE OF OWNED ASSETS”.
EXPENSES ARE OF TWO TYPES:
(I) DIRECT EXPENSES
(II) INDIRECT EXPENSES.

10. DIRECT OR CHARGEABLE EXPENSES:-THESE ARE EXPENSES WHICH CAN BE DIRECTLY,
CONVENIENTLY AND WHOLLY ALLOCATED TO SPECIFIC COST CENTERS OR
COST UNITS. FOR EG.EXCISE DUTY, ROYALTY, SURVEYOR’S FEES, COST OF
RECTIFYING, DEFECTIVE WORK, TRAVELLING EXPENSES TO THE JOB,
EXPERIMENTAL EXPENSES OF PROJECTS, EXPENSES, OF DESIGNING OR
DRAWINGS, REPAIRS AND MAINTENANCE OF PLANT OBTAINED ON HIRE AND
HIRE OF SPECIAL EQUIPMENT OBTAINED FOR A CONTRACT.
INDIRECT EXPENSES: - THESE ARE EXPENSES WHICH CANNOT BE DIRECTLY,
CONVENIENTLY AND WHOLLY ALLOCATED TO COST CENTRES OR COST
UNITS.FOR EG. RENT, INSURANCE, MUNICIPAL TAXES, SALARY OF MANAGER,
CANTEEN AND WELFARE EXPENSES, POWER AND FUEL, COST OF TRAINING
FOR NEW EMPLOYEES, LIGHTING AND HEATING, TELEPHONE EXPENSES, ETC.

11. OVERHEADS
COST RELATED TO A COST CENTRE OR COST UNIT MAY BE DIVIDED INTO TWO I.E.
DIRECT AND INDIRECT COST. THE INDIRECT COST IS THE OVERHEAD COST AND IS THE
TOTAL OF INDIRECT MATERIAL COST, INDIRECT LABOUR COST, AND INDIRECT
EXPENSES. INDIRECT COSTS ARE THOSE COSTS WHICH ARE INCURRED FOR THE
BENEFIT OF A NUMBER OF COST CENTERS OR COST UNITS.
BLOCKER AND WELTMER DEFINE OVERHEAD AS FOLLOWS:
"OVERHEAD COSTS ARE OPERATING COST OF A BUSINESS ENTERPRISE WHICH
CANNOT BE TRACED DIRECTLY TO A PARTICULAR UNIT OF OUTPUT. FURTHER SUCH
COSTS ARE INVISIBLE OR UNACCOUNTABLE."

12. TYPES OF OVERHEADS
MANUFACTURING (WORKS, FACTORY OR PRODUCTION) EXPENSES
SUCH INDIRECT EXPENSES WHICH ARE INCURRED IN THE FACTORY AND
CONCERNED WITH THE RUNNING OF THE FACTORY OR PLANT ARE KNOWN
AS MANUFACTURING EXPENSES. EXPENSES RELATING TO PRODUCTION
MANAGEMENT AND ADMINISTRATION ARE INCLUDED THERE IN.
FOLLOWING ARE A FEW ITEMS OF SUCH EXPENSES:
• RENT, RATES AND INSURANCE OF FACTORY PREMISES, POWER USED IN
FACTORY BUILDING, PLANT AND MACHINERY ETC.

13. TYPES OF OVERHEADS…..
SELLING AND DISTRIBUTION EXPENSES
EXPENSES INCURRED FOR MARKETING OF A COMMODITY, FOR SECURING
ORDERS FOR THE ARTICLES, DISPATCHING GOODS SOLD, AND FOR MAKING
EFFORTS TO FIND AND RETAIN CUSTOMERS ARE CALLED SELLING AND
DISTRIBUTION EXPENSES
EXAMPLES ARE:- ADVERTISEMENT EXPENSES, COST OF PREPARING TENDERS,
TRAVELING EXPENSES, BAD DEBTS, COLLECTION CHARGES ETC. WAREHOUSE
CHARGES PACKING AND LOADING CHARGES, CARRIAGE OUTWARDS, ETC.