COST &

COST ELEMENTS

Presentation byNithin Easo George

MACFAST

Basic Concept of Cost

Cost: Amount of expenditure incurred on a given thing.

“An expenditure made to secure an economic benefit, generally resources that promise to produce revenue. The sources may have tangible substance(material) or they may take the form of labour and services.”

-Crowning shield

• “The amount of expenditure incurred or attributed to a given thing”-ICMA

• Cost Accounting- “ the application of costing and cost accounting principles , methods and techniques to the science, art and practice of a cost control. It includes the presentation of information derived there from the purpose of managerial decision making”

Elements of cost

1.Material2.Labour 3.Expenses 1(a)Direct material:• All type of raw material issued • Raw material purchased• Transferred from one cost centre to another cost

centre• Primary packing material

1(b) Indirect material cost:• Stores used in maintenance of

machinery ,building etc• Stores used by service departments• Material which have very low cost 2(a) Direct labour:• Engaged on the actual production of the

product

• Supervision, maintenance and tool setting• Inspectors , analysts etc

2(b) Indirect labour:• Apportioned or absorbed by cost centres or cost

units

3(a) Direct or chargeable expense:• Incurred on a particular product or job• Eg :Excise duty, royalty

3(b) Indirect expenses:Eg: Rent, insurance, municipal taxes, salary of manager , welfare expenses , power and fuel etc

4.Overhead:Cost of indirect material and indirect labour & other expensesa) Factory or works overheadsEg: Dep on P,M&B, insurance charges on fixed assets

b) Office &administrative overhead:Expenses in direction, control and administration Eg :Office rent, light, heat, salaries, investigation , experiments etcc) Selling and Distribution overhead:Eg: Sales and office expenses, packing and free gift, warehouse rent, warehouse staff salaries etc

Nature and variability• Fixed cost-building rent, salaries to office staff,

salary to manager , factory rent ,insurance of building , plant and machinery etc

• Semi-variable cost-partly affected by fluctuations in the volume of output or turnover

• variable cost-Materials , depreciation and repairs of machine, salesmen commission , fuel &packing expenses etc

• Controllable cost- cost of raw material is controlled by purchasing in larger quantities

• Non-controllable cost-factory rent , managerial salaries , light charges etc

• Opportunity cost-Value of benefit sacrificed in favor of an alternative course of action

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