Raw materialWork in ProgressFinished GoodsMaterialLabourPlantMachinery

Classification Of Cost According to.. NatureFunctionIdentifiablyBehaviorAssociation With ProductsControllabilityNormalityTimeRelevance Other Costs

Elements of costsIn 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.Rights reserved by Prof. Bhagyashree Kulkarni

Elements of cost

Prime cost Overheads

Direct Direct DirectMaterial labour expenses Indirect Indirect Indirect Material Labour Expenses

Factory Office & Selling & distributionOverheads administration overheads o overheads

Element of cost

Cost objectCost Cost unitCost centreProfit centre*

Cost objectIt is an activity or item or operation for which a separate measurement of costs is desiredE.g. the cost of operating the personnel department of a company, the cost of a repair fob, and the cost for control *

Cost It is the amount of expenditure incurred on a specific cost objectTotal cost = quantity used * cost per unit (unit cost)*

*

Cost unitIt is a quantitative unit of product or service in which costs are ascertained, e.g. cost per table made, cost per metre of cloth*

Cost centreIt is a location or function of an organisation in respect of which costs are ascertainedE.g. the rent, rates and maintenance of buildings; the wages and salaries of strorekeepers*

Profit centreIt is location or function where managers are accountable for sales revenues and expensesE.g. division of a company that is responsible for the sales of products*

Cost classification

Direct costIndirect cost (overhead)

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Direct Costs Definition: Direct costs are identifiable to a final cost objective (a particular contract). Examples: direct material and direct labor.All costs identified specifically with a contract are direct costs for that contract and shall not be charged to another contract directly, or indirectly.No cost shall be charged to a contract as a direct cost, if other costs incurred for the same purpose in like circumstances have been charged as an indirect cost.*

Cost that can be identified specifically with or traced to a given cost objectThe direct costs consist of the following three elements:Direct materialsDirect labourDirect expenses*

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Indirect Costs

Definition: Indirect costs are not directly identifiable with a final cost objective (e.g. a particular contract), but identified with two or more final cost objectives.

The distribution of indirect costs to various contracts should roughly be based on the benefits received on each contract.

No cost shall be charged to a contract as an indirect cost if other costs incurred for the same purpose in like circumstances have been charged as a direct cost to that contract or any other contract.*

The ProductClassifications of Manufacturing Costs

Manufacturing costs are often classified as follows:Direct MaterialDirect LaborManufacturing Overhead

Classification Of Cost According To Nature Or Elements

Materials CostLabourCostExpenses

MATERIAL COST

IT IS A COST OF MATERIALS WHICH ENTER INTO & FORM PART OF PRODUCT

e.g. - timber in furniture making - clay in brick making

DIRECT MATERIAL COST

Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it.Example: A radio installed in an automobile

Direct materialsDirect materials are the raw materials that become part of the product.

The cost of materials the cost of materials used entering into and becoming the elements of a product or service

E.g. fabrics in garments

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INDIRECT MATERIAL COSTIT IS THE COST OF MATERIAL WHICH DO NOT FORM THE PART OF PRODUCT BUT WHICH HELP THE PRODUCTION

e.gLUBRICATING OIL , FUEL etc.

Small items like thread, gum , nails etc

Though forms part of product but difficult to calculate cost per unit of that material ----so consider as direct material

Indirect materialsSuch as stationery, consumable supplies, spare parts for machine that assist to the production of final products*

LABOUR COST

Direct LaborThe definition of direct labor is pretty easy. Direct labor represents the people who do the core work of the business. For example, if the business is a construction company, direct labor would be the people actually constructing the building. They would be the people with hammers and saws in their hands. In a retail store, direct labor would be the people helping on the sales floor doing the basic work that takes place serving the customers. In a grocery bag factory, direct labor are the people running the machines actually making the bags. I think of direct labor as the people who make or build the product.

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Labour costThe labour cost is the cost of remuneration of the employees of an undertaking. such as Wages, salaries, commissions, bonus, etc.

There are two types of labour cost areDirect Labour costIndirect Labour cost

Direct LaborThose labor costs that can be easily traced to individual units of product.Example: Wages paid to automobile assembly workers

Direct labourThe cost of remuneration for working timeE.g. assembly workers wages in toy assembly*

Indirect labourSuch as salaries of factory supervision and office staff that do not directly involve in production of the final product

If a person's labor cannot be easily linked to a specific customer's order or the person does not directly build the product, the person's labor is called "indirect labor."

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EXPENSE COST

Expenses costThe cost of services provided to an undertaking and the notional cost of the use of owned assets.

Expenses are two typesDirect ExpensesIndirect Expenses

Direct expensesOther costs which are incurred for a specific product or service E.g. royalties*

Indirect expensesSuch as rent, rates, depreciation, maintenance expenses that do not have instant relationships with the manufacturing processes*

OVERHEADS

The definition for overhead is easy. Here it is......

If a cost is not direct labor or direct materials, the cost is overhead.

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Overheads The aggregate of Indirect material cost, Indirect wages and Indirect expenses

Three types such as Indirect material costIndirect labour costIndirect expenses

Manufacturing OverheadManufacturing costs that cannot be easily traced directly to specific units produced.Examples: Indirect materials and indirect labor

Indirect cost (overhead)Cost that cannot be identified specifically with or traced to a given cost objectThey are identified with cost centres as overheadsIndirect materialsIndirect labourIndirect expenses*

Indirect expenses overheadsFactory overheadsOffice & administration overheadsSelling & distribution overheads

Direct Material Cost+Direct Labour Cost+Direct Expenses CostIndirect Material Cost+Indirect Labour Cost+Indirect Expenses CostPrime CostOverheadsRights reserved by Prof. Bhagyashree Kulkarni

Assigning Costs to Cost ObjectsDirect costsCosts that can be easily and conveniently traced to a unit of product or other cost object.Examples: direct material and direct laborIndirect costsCosts that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

Nonmanufacturing Costs

Cost accumulation*Prime cost = direct materials + direct labour + direct expensesProduction cost = Prime cost + factory overheadOR = Direct materials + Conversion cost*Conversion cost is the production cost of converting raw materials into finished productTotal cost = Prime cost + Overheads (admin, selling,distribution cost)OR = Production cost + period cost (administrative, selling, distribution and finance cost)Period cost is treated as expenses and matched against sales for calculating profit, e.g. office rental

Major Cost ElementsDirect Labor CostLabor CategoriesLabor RatesLabor HoursDirect Material CostThe Actual MaterialsRaw materialPurchased parts and/or assembliesSubcontractsMiscellaneous materialDiscounts, Scrap, Inventory Shrinkage, & Freight-in

Indirect CostsMaterial HandlingFringe BenefitsOverhead (or burden)G&A ExpensesOther Direct CostsNonrecurring costsSubcontractsTravelProfit or FeeCost of MoneyEscalation*

**Last bullet: Here, we're really talking about consistency in a particular contractor's practices. For example, if a contractor's past practice is to charge all travel indirect in overhead, you shouldn't see it as a direct charge in your proposal.*First bullet: For example, the contractor may have a group of indirect costs that tend to benefit contracts based on the amount of direct labor expended on each contract. The contractor applies these costs to each contract by applying an overhead rate (a percentage) to the direct labor dollars for the contract.

Last bullet: Here, we're essentially talking about consistency in a particular contractor's practices.Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. These costs are incurred to make a product.

Two more cost categories are often used in discussions of manufacturing costsprime cost and conversion cost. Prime cost is the sum of direct materials cost and direct labor cost. Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.Direct materials are raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it. Examples include the aircraft engines on a Boeing 777, the Intel processing chip in a personal computer, the blank video cassette in a pre-recorded video, and a radio in an automobile.

Direct labor consists of that portion of labor cost that can be easily traced to a product. Direct labor is sometimes referred to as touch labor, since it consists of the costs of workers who touch the product as it is being made.

Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. These costs cannot be easily traced to specific units produced (also called indirect manufacturing cost, factory overhead, and factory burden).

Manufacturing overhead includes indirect materials that are part of the finished product, but that cannot be easily traced to it. It includes indirect labor costs that cannot be conveniently traced to the creation of products.

Other examples of manufacturing overhead include: maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on manufacturing facilities, etc.

A cost object is anything for which cost data are desired including products, customers, jobs, organizational subunits, etc. For purposes of assigning costs to cost objects, costs are classified two ways:

Direct costs are costs that can be easily and conveniently traced to a specified cost object. Examples of direct costs are direct material and direct labor.

Indirect costs are costs that cannot be easily and conveniently traced to a specified cost object. An example of an indirect cost is manufacturing overhead. Common costs are indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes, most of these other costs are typically classified as selling costs and administrative costs. These costs are also called selling, general and administrative costs, or SG&A. Selling and administrative costs are incurred in both manufacturing and merchandising firms.

Selling costs include all costs necessary to secure customer orders and get the finished product into the hands of the customer. These costs are also referred to as order-getting and order-filling costs. Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.

Administrative costs include all executive, organizational, and clerical costs associated with the general management of an organization. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall general administration of the organization as a whole. *