Explain briefly the various elements of cost.

OR

Explain the elements of total cost.

There are three basic elements of cost — Material, Labour and Expenses. Each of these can be further sub-classified into direct and indirect.

1. Material Cost

Material cost is the cost of substances from which the product is made. Examples: paper in a book, plastic in a ball pen, timber in furniture.

• Direct Material — Materials that become an integral part of the finished product and can be directly charged to it. Example: cloth in dress making.
• Indirect Material — Materials that cannot be directly assigned to a specific product. Example: oil, grease, consumable stores.

2. Labour Cost

Labour cost is the cost of human effort. It is the total remuneration paid to workers, supervisors and managers.

• Direct Labour — Labour wholly and directly identified with a particular product. Example: wages paid to a machine operator, wages of a carpenter in a furniture factory.
• Indirect Labour — Labour that cannot be directly identified with a particular product. Example: wages of storekeeper, foreman, timekeeper.

3. Expenses

Expenses are costs incurred other than on material and labour, for production, distribution and management of the organisation.

• Direct Expenses — Expenses directly identifiable with a specific product. Example: hire charges of a machine for a specific job, rent of a room used to produce a specific product.
• Indirect Expenses — Expenses that cannot be directly identified with a specific product. These together with indirect material and indirect labour form overheads, of which there are three types — Factory, Office & Administrative, and Selling & Distribution.

The total of direct material + direct labour + direct expenses is called prime cost, while indirect costs together form overheads. Together they make up total cost.