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Cost & Elements of Costs

ISB & M
Elements of Cost

Materials Cost Direct Materials


Indirect Materials

Labour Cost Direct Labour


Indirect Labour

Expenses Direct Expenses


Indirect Expenses
Direct Materials Cost
The cost of material entering into and becoming constituent
element of a product.
Example: Cotton in textile, leather in shoes, timber in
furniture, etc
Some Examples from Your Side please….

Indirect Materials Cost: Materials cost other than direct


material cost. The value of indirect material is not
significant and difficult to measure, even though essential
for completion of the product.
Examples : Nails in furniture, thread in garment, etc
Some Examples from Your Side please….
Labour Cost
The cost of remuneration(Wages, salaries ,bonus
etc) of an employee of an organization.
Direct Labour: The cost of remuneration for
employee’s efforts and skills applied directly
to a product or saleable service.
Some examples….?
Indirect Labour Cost: wage cost other than
direct wages cost. Essential but not significant.
Some Examples…?
Expenses
All costs incurred for the production of the
product other than material and labour are
termed as expenses.
Direct Expenses: Costs other than material or
wages incurred for a specific product .
Examples :- cost of Moulds,cost of patents and
royalties,licence fees,etc.
Indirect Expenses:Other than direct expenses.
Examples: Rent,repairs,depriciation,insurance.
Overheads
Overheads constitute the total of indirect material
cost, indirect labour cost and indirect expenses.
Overheads are period costs and not product cost.

Overheads are classified into three groups


A-Factory Overheads or Production Overheads or
Works Overheads
B-Office & Administrative Overheads
C- Selling and Distribution Overheads
A-Factory Overheads or Production
Overheads or Works Overheads:
All indirect expenditure incurred within the factory during the
production process.
Examples of Factory overheads:
• Indirect materials : 1-Consumable stores
i.e. oil, grease, lubricants.
2-Nails and Polish in furniture
3-Threads and buttons in garments
• Indirect Labour : Salary of helpers, maintenance
workers, cleaners, etc
• Indirect Expenses: Rent and insurance of Factory
/machinery, Depreciation of factory building & machinery,
repairs and maintenance of factory assets, Power & fuel,
workers welfare & canteen, medical facilities, etc
B-Office & Administrative Overheads
The cost of formulating the policy in directing the
organization and controlling the operations of an
undertaking which is not related directly to production
,selling and distribution functions of an undertaking.
Examples of Office and administrative Overheads
• Indirect Material: office printing &
stationery, paper, pens
• Indirect labour: Salary of office manager, Director
fees, Audit fees, etc
• Indirect Expenses: Office rent, Telephone ,Legal
charges, office electricity, etc
C- Selling and Distribution Overheads
Selling overheads are incurred for the purpose of promoting
sales and retaining the customers of the business.

Distribution overheads are incurred from time the production


is completed till goods are ready for packaging & dispatch
to customer.
• Indirect material : catalogues, packaging materials, free
gifts and samples.
• Indirect labour : Salaries of salesman, wages of delivery
vans ,packers.
• Indirect expenses: Advertising ,Travelling exp of sales
man, warehouse exp, rent & insurance
of go down, sales promotions, etc.
Some Fun…..
Group the following indirect expenses into
following categories

1. Production Overheads = PO
2. Administrative Overheads = AO
3. Selling Overheads = SO
4. Distribution Overheads = DO
Say Loudly….Garv Se Kaho…
A. Factory cost-
B. Plant maintenance-
C. Market Research-
D. Postage & stationery-
E. Cost of free samples-
F. Warehouse rent-
G. Upkeep of delivery vehicle-
H. Directors fees-
I. Lubricant Oil -
Some More…
J. Maintenance of cranes-
K. Carriage outwards-
L. Works manager salary-
M. Cleaners salary-
N. Cost of idle time in factory-
O. Advertisement –
P. Labour wages-
Q. Storekeepers wages-
R. Cash discount allowed-
Still Some More
S. Cleaning material-Factory-
T. Protective Clothing-
U. Office expenses-
V. Commission to Travellers-
W. Travelling expences for selling
X. Office salaries –
Y. Depreciation on plant and machinery-
Z. Wages to corporate office peon-
Components of Total cost

• Prime cost =Direct Material+Direct


Labour+Direct Expences
• Factory Cost=Prime Cost+Factory Overheads
• Cost of Production=Factory Cost+Office &
Administrative Overheads
• Total Cost =Cost of production+Selling and
distribution Overheads
Prime Cost

Direct Material + Direct Labour + Direct Expenses

Factory Cost

Prime Cost + Factory Overheads

Cost of Production

Factory Cost + Office & Administrative Overheads


Total Cost or Cost of Sale

Cost of Production
+
Selling and Distribution Overheads
. Cost Sheet or Statement of Cost

Particulars Amt(Rs) Amt(Rs)


Opening Stock *
Add: Purchases *
Total *
Less: Closing Stock of Raw Materials *
*
Direct Wages * *
Direct Expenses * *
Prime Cost **
Factory Overheads *
Factory Cost **
Office & Admin Overheads *
Cost of Production **
Selling & Distribution Overheads *
Cost of Sales **
Profit
Sales **
Format

Cost Sheet or Statement of Total Cost

Particulars Amt Amt


Material-Opening Stock
Add: Purchases
Total
Less: Clos Stock

Prime Cost

Production Overheads
1
Some More Fun…
• Opening Stock 114000
• Production wages 96000
• Purchases 483000
• Factory rent & rates 100000
• Factory Power 15000
• Wages paid to maintenance worker 24000
• Machinery Repairs 5500
• Depreciation of Machinery 13000
• Work Salaries 12000
• Office Salaries & Expenses 120000
Some are remaining…
• Postage & Stationery 10000
• Storekeepers Wages 24000
• Travelling Exp of Salesman 25000
• Sales office Exp 50000
• Directors fees 50000
• Drivers Wages & other Distribution Exp 12000
• Salesman Commission 20000
• Salesman Salaries 120000
• Auditors Fees 15000
• Advertising 30000
• Closing Stock 145000
Kya Dekh Rahe Ho…..

…….do your calculations….


Cost Sheet or Statement of Total Cost
.
Particulars Amt Amt
Material-Op Stock 114000
Add: Purchases 483000
Total 597000
Less: Clos Stock 145000 452000
Direct wages 96000
Prime Cost 548000

Production Overheads
Factory Rent 100000
Electricity 15000
Indirect wages 24000
Machinery Repairs 5500
Depriciation of Machinery 13000
Work Salaries 12000
Storekeepers Wages 24000 193500
Factory Cost 741500

Office & Admin Overheads


Office Salaries & Exp 120000
Postage & stationery 10000
Directors Fees 50000
Auditing Fees 15000 195000
Cost of Production 936500

Selling & Distribution


Travelling Exp 25000
Sales Off Exp 50000
Drivers Wages 12000
Salesman Comm 20000
Salesman Salaries 120000
Advert 30000 257000
Cost of Sales 1193500
Now if …..
What should be selling price to obtain a profit of
20% on Selling Price ?
So, if selling price is 100,cost of sales will be 80
Cost of sales 1193500…..which is 80
So, how much for 100 ?
=(100*1193500) Divided by 80
It comes to….1491875 is the Ans…

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