Elements of costs and classification of expenditure

Elements of Costs
and
Classification of Expenditure
Prof. Bhagyaashri Kulkarni

Elements of costs
In order to interpret the term cost correctly
and to ascertain the cost with respect to the
cost centers, the cost attached with the
manufacturing process may be
subdivided, known as Elements of Costs.
(A) Material
(B) Labour
(C)Expenses
Rights reserved by Prof. Bhagyashree Kulkarni

Elements of Cost
Material
Direct Indirect
Labour
Direct Indirect
Expenses
Direct Indirect
Selling
& Distribution
Overheads
Administration
Overheads
Factory /
Works
Overheads

Material Cost
The cost of commodities and materials used by the
organization.
Direct Material Cost –
all raw materials, either purchased from outside or
manufactured in house.
Indirect Material Cost –
material which cannot be identified with the
individual cost centre, assist the manufacturing
process and does not become an integral part of
finished goods.
Consumable stores, Cotton waste, oils and
lubricants, stationary material etc.

Labour Cost
The cost of remuneration paid to the employees of
the organisation.
Direct Labour Cost –
identified with the individual cost centre and is
incurred for those employees who are engaged in
the manufacturing process.
Indirect Labour Cost –
cost which cannot be identified with the individual
cost centre and is incurred for those employees
who are not engaged in the manufacturing process
but only assist.
wages paid to foreman/storekeeper, salary of
works manager, Accountant/Personnel dept.
salaries etc.

Expenses Cost
This is the cost of services provided to the
organisation and the notional cost of assets owned.
Direct Expenses Cost –
Expenses identified by individual cost centers.
Hire charges of machinery/equipment for particular
job, cost of defective work etc.
Indirect Expenses Cost –
Expenses which cannot be identified by individual
cost centers.
Rent , Telephone expenses, Insurance, Lightening
etc.

Direct Material Cost
+
Direct Labour Cost
+
Direct Expenses
Cost
Indirect Material Cost
+
Indirect Labour Cost
+
Indirect Expenses
Cost
Prime Cost
Overheads

Overheads- Classification
Factory / Works Overheads
Consist of all overhead costs incurred from the stage
of procurement of material till the production of
finished goods.
 Indirect material such as Consumable
stores, Cotton waste, oils and lubricants, stationary
material etc.
 Indirect labour cost such as wages paid to
foreman/storekeeper, salary of works
manager, Accountant/Personnel dept. salaries etc.
 Indirect Expenses cost such as Carriage inward
cost, Factory lightening/power expenses, rent/
Insurance /repairs for factory
building/machinery, depreciation on factoryRights reserved by Prof. Bhagyashree Kulkarni

Office and Administrative Overheads
These overheads consists of all overheads costs
incurred for the overall administration of the
organisation. They include :
 Indirect material such as stationary items, office
supplies etc.
 Indirect labour cost such as salaries paid to
account and administrative staff, Directors’
remuneration etc.
 Indirect expenses such as
postage/telephone, depreciation on office
building, legal/audit charges, Bank charges .
Rent/insurance / repairs in offices etc.

Selling and Distribution Overheads
These overhead consist of all overhead costs
incurred from the stage of final manufacturing of
finished goods till the stage of sale of goods in the
market and collection of dues from customers.
 Indirect material such as packaging
material, samples etc.
 Indirect labour like salaries paid to sales
personnel, commission paid to sales manager.
 Indirect expenses like carriage outward, warehouse
charges, advertisement, bad debts, repairs and
running of distribution van, discount offered to
customers etc.

Selling and Distribution Overheads
 Subscription to mercantile agencies and journals.
 Printing of catalogues and price lists and general
stationary.

Classification of Expenses
A. Direct Material
Direct Labour Prime Cost
Direct Expenses
B. Works Expenses,
Indirect Materials Works or Factory cost
Indirect Labour i.e. A + B
Rent & taxes of factory (Also often Production Cost)
premises, Depreciation,
Repairs, Fuel & power etc.
C. Office Expenses
Office Rent, Rates, Office Cost
Stationary i.e. A + B + C
Directors fees etc. Or Cost of Production

D. Selling Expenses, such as
Sales staff salaries
Show room expenses Cost of Sales,
Advertising i.e. A + B + C + D
Carriage outwards
Packing
Bad Debts
E. Plus Profit
Or Selling price
Minus Loss i.e. A + B + C + D + E
Classification of Expenses

Expenses excluded from Costs
Item of expenses which are apportionment of profit
should not form a part of the costs. These are-
 Income tax
 Dividend to share holders
 Commission to partners, managing agents etc.
 Capital Loss
 Interest on Capital
 Interest paid on debentures
 Capital expenses etc.

Treatment of Stock
Stocks are generally categories as-
I. Raw Material
II. Work-in-progress
III. Finished Goods
Stock of raw materials should be adjusted in order to
find out cost of consumption of raw materials:
Value of Raw material consumed =
Opening Stock of Raw Material + Net Purchases –
Closing Stock of Raw Materials

Treatment for semi finished goods
Work-in-progress is Semi finished goods at the time
of finding of Total Cost of Production.
Work-in-progress consists of :
I. Cost of Materials to date
II. Cost of labour to date
III. Manufacturing expenses to date
The amount of work-in-progress consumed is excess
of opening balance of work-in-progress over closing
work-in-progress.

Statement of Cost / Cost Sheet
Rs. Rs.
Raw Materials
Opening stock of Raw materials P
Raw Material purchased P
Cost of Materials available for use P
Less : Closing stock of raw Materials (P)
Cost of Raw materials used / Consumend P
Direct labour Wages P
Other Direct charges P
Prime Cost P
Factory Overheads:
Indirect materials P
Indirect Labour P
Depreciation on factory Building P
Depreciation on Factory equipments P
Insurance P
Repairs and maintenance P
Other factory overheads P P
Gross Factory Cost P
Add : Work-in-progress (Opening) P
Less: Work-in-progress (Closing) (P)
Factory cost P
Office and Administrative overheads
Office salaries P
Office rents, Insurance P
Other office overheads P P
Office Cost / Cost of Production P
Add : Opening Stock of Finished goods P
Goods available for sale P
Less: Closing Stock of Finished Goods (P)
Cost of Goods sold P
Selling and Distibution Expenses P
Cost of Sales P
Profit P
sales P

Elements of costs and classification of expenditure

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