2. A cost is composed of three elements – Material,
Labor, and Expenses. Each of these three elements
can be direct and indirect, i.e., direct materials and
indirect materials, direct labor and indirect labor,
direct expenses, and indirect expenses.
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.
3. Direct Labour
It refers to the amount which
paid to the workers who are directly
engaged in the production of goods. It
varies directly with the level of
output.
Indirect material
• Indirect materials are materials that a
company uses in the production
process.
4. Indirect Labour
It represents the amount paid to workers who
are indirectly engaged in the production of goods.
It does not vary directly with the level of output.
Direct expenses
Direct expenses mean all expenses directly
connected with the manufacture, purchase of goods,
and bringing them to the point of sale
Direct expenses include carriage inwards, freight
inwards, wages, factory lighting, coal, water and fuel,
royalty on production, etc
5.
6. Cost sheet
Meaning:
A cost sheet is a formal documentation of
the fixed, variable, direct, and indirect
costs a business incurs from start to finish
in its production process
8. formula:
(1) Prime Cost is the aggregate of Direct materials, Direct Labour and Direct Expenses.
Prime Cost = Direct Materials + Direct Labour + Direct Expenses
(2) Works Cost is the aggregate of prime cost and works overhead. It consists of the total of all
items of cost incurred in the manufacturing of a product.
Works Cost = Prime Cost + Works Overhead.
(3) Cost of production includes works cost and administration overheads. Production is not deemed
to be complete without the managerial and office expenses.
Cost of production = Works Cost + Office and Administration Overheads
(4) Cost of Sales (Total Cost) is the aggregate of all expenses attributable to it. It comprises cost of
production plus selling and distribution overheads.
Cost of Sales = Cost of production + Selling and Distribution overheads
When profit is added to the cost of sales, sales can be found out. Usually selling prices are fixed on
the basis of cost of sales. It ensures that all the costs are recovered and any desired profit is also
obtained
9. • Cost Sheet – 5 Important Uses Given in Points
1. It helps in presenting the total cost, the different elements of cost and cost per unit.
2. It helps in fixing the selling price/quotation.
3. It helps in cost control by comparison of various elements of cost with the help of standard
costing.
4. It also helps in formulating production policy.
5. It communicates about elements of cost to all levels of management.
