The elements of cost include material cost, labor cost, and expenses. Material cost refers to the cost of materials used in production and includes direct material costs which can be traced to a product and indirect material costs which cannot. Labor cost is the cost of employee wages and salaries, including direct labor costs of employees involved in production and indirect labor costs of support staff. Expenses include direct expenses which can be associated with a product and indirect expenses or overheads which cannot, such as factory overhead, administrative overhead, and selling/distribution overhead. Understanding the elements of cost facilitates cost analysis and provides manufacturers with cost information.

1. ELEMENT
S OF
COST

2. ELEMENTS OF
COST
The elements of cost are the factors on
the basis of which expenditure is
incurred. It may be defined as a group
name of smaller costs of identical
nature. Elements of cost make the
analysis of the cost easy and facilitate
maximum information regarding costs to
the manufacturers.

3. COST
Cost refers to the expenditure incurred on producing
the goods and services. It represents the sacrifice,
foregoing or a release of something of value.
ACCORDING TO ICMA (Institute of Cost and
Management Accountants), London
‘Cost is the amount of expenditure (actual or
notional) incurred on or attributable to a given
thing.”
Example: In manufacturing of automobiles, the
expenditure incurred on its spare parts, painting and
finishing, design, etc constitute the cost of the
automobile.

4. ELEMENTS
OF COST
MATERIAL
COST
Direct Material
Cost
Indirect Material
Cost
LABOR
COST
Direct Labor Cost
Indirect Labor Cost
EXPENSES
Direct Expenses
Indirect Expenses
or Overheads

5. MATERIAL
COSTIt refers to the cost of the material that is
supplied to the manufacturing unit for
producing the finished product.
Example: Cost of thread, nails, shoe
polish, leather supplied to an
undertaking engages in production of
shoes constitute material cost.

6. MATERIAL COST
DIRECTMATERIAL COST
Direct material cost
is the cost of those
materials that can be
easily identifiable in
the finished product.
Example:
Cost of leather in shoes.
Cost of glass in mirror.
Cost of iron in machinery.
INDIRECTMATERIALCOST
Indirect Material Cost is
the cost which is not
directly attributable to
the finished product.
These costs are not
absorbed or apportioned
by the cost units or cost
centers directly.
Example:
Fuel or electricity needed
for generating power.
Materials consumed for
repair work.

7. LABOR COST
Labor cost refers to the cost of
remuneration of the workers employed
in an organization. It includes the
amount of wages, salaries, perquisites,
allowances etc.
Example:
Salary paid to workmen
Commission paid to agents

8. LABOR COST
DIRECT LABOR
COST
These are also known as
direct wages. This cost
can be identified with and
allocated to cost centers
or cost units.
Example:
Wages paid for spinning
yarn in a spinning mill.
Wages paid to the driver
and conductor of a bus.
INDIRECT LABOR
COST
These are also known as
indirect wages. It refers
to that part of labor cost
which is not directly
attributable to the cost
centers or cost units.
Example:
Salary paid to the
manager, Salary paid to
the guard of the office.

9. EXPENSES
Expenses refer to the cost of services
provided to an undertaking and the
notional costs of the use of the assets
owned by the business house.
Example: Deprecation on building, plant
and machinery etc.

10. EXPENSES
DIRECT EXPENSES
 These expenses are also
called chargeable
expenses. These expenses
can be directly identified
to the cost centers or cost
units.
 Example:
 Carriage and freight paid
on direct materials
purchased.
 Import duty
 Octroi duty etc.
INDIRECT EXPENSES
(OVERHEADS)
 Expenses which cannot be
allocated to the cost centers
or units but can be
apportioned by them are
known as overheads or
indirect expenses.
 Example:
 Rent, rates and taxes
 Repairs to machinery
 Factory lighting
 Office lighting
 Depreciation and insurance of
showroom building etc.

11. OVERHEADS
OFFICE AND
ADMINISTRATIVE
OVERHEADS
FACTORY
OVERHEADS
SELLING AND
DISTRIBUTION
OVERHEADS

12. OVERHEADS
•It includes all the indirect costs incurred in factory
in respect of manufacturing operations.
•Example: Cost of lubricating oil, coal, gas and
fuel, etc.
FACTORY
OVERHEADS
•It includes all the indirect costs relating to
direction, guidance, management, control and
administration of business concern.
•Example: Salary of general manager, insurance
expenses, etc.
OFFICE AND
ADMINISTRATION
OVERHEADS
•These include all indirect costs which are incurred
for Promoting the sales, Retaining the customers,
Providing after sale services to the consumers
•Example: advertisement, salary of sales manager
etc.
SELLING AND
DISTRIBUTION
OVERHEADS