Elements of Cost

This time, I am in my city's local park with two of my cost accounting books to write some cost accounting contents. I wrote very less on cost accounting within last two years in this site. So, I am thinking to cover all important topics of cost accounting in next august. So, if you are learning cost accounting, you can also enjoy to read cost accounting from this site in the month of august 2010.

One of main aim to choose park for writing these contents, because in the cool air of park, I feel happy to create any new creation. Writing of contents is also creation. So, I also suggest to you to study in park.

Ok, now, I come on the above topic, element of cost. It is basics in cost accounting. If you know elements of cost, you can try to collect them for finding the cost of product. Element of cost provides the complete structure in which we can identify our total cost. For example, you go to market and buy one packet of tiger biscuit by paying Rs. 5. But this price's major part is the cost of packet. Manufacturer made this packet of biscuit by purchasing its raw material, producing by the help of machines and labours and delivered you by any transport means. All these things have some cost and these cost will be element of cost in simple words.

We can divide total cost in following main elements of costs:

1. Direct Cost

It is that element of cost in which we can include the cost of direct material and direct labour. If we take its total, it will be prime cost.

a) Direct Material Cost

Direct material is that material which we find in finished product and easily measures its cost. For example, for making furniture, woods are direct material and its cost will be the part of direct cost.

b) Direct Labour Cost

Direct labour is used for producing the product. We pay wages for making product to labourers and this cost will be the direct labour cost.

c) Direct expenses cost

Except direct material and direct labour, all direct expenses will be direct expenses cost.

2. Indirect Cost

c) Overheads

When we can not charge an expense directly on the product, we can say it is indirect expense or overhead. In overhead, we can include indirect material cost, indirect labour cost and other following indirect expenses.

i) manufacturing overheads
ii) administrative overheads
iii) selling overheads
iv) research and development cost

Factory rent and rates, insurance of plants or telephone bill are the main examples of overheads.

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Accounting Education: Elements of Cost
Elements of Cost
Accounting Education
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