2. ClassifiCation of Cost
According to……..
1. Nature
2. Function
3. Identifiably
4. Behavior
5. Association With Products
6. Controllability
7. Normality
8. Time
9. Relevance
10.Other Costs
3. ElEmEnts of Costs
In 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
4. Elements of cost
Prime cost Overheads
Direct Direct Direct
Material labour expenses
Indirect Indirect
Indirect
Material Labour Expenses
Factory Office & Selling & distribution
Overheads administration overheads
o overheads
5. ElEmEnt of Cost
Cost object
Cost
Cost unit
Cost centre
Profit centre
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6. Cost object
It is an activity or item or operation for
which a separate measurement of costs
is desired
E.g. the cost of operating the personnel
department of a company, the cost of a
repair fob, and the cost for control
6
7. Cost
It is the amount of expenditure incurred
on a specific cost object
Total cost = quantity used * cost per unit
(unit cost)
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9. Cost unit
It is a quantitative unit of product or
service in which costs are ascertained,
e.g. cost per table made, cost per metre
of cloth
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10. Cost centre
It is a location or function of an
organisation in respect of which costs
are ascertained
E.g. the rent, rates and maintenance of
buildings; the wages and salaries of
strorekeepers
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11. Profit centre
It is location or function where managers
are accountable for sales revenues and
expenses
E.g. division of a company that is
responsible for the sales of products
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13. Direct Costs
DefinitionDefinition: 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.
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14. Cost that can be identified specifically
with or traced to a given cost object
The direct costs consist of the following
three elements:
Direct materials
Direct labour
Direct expenses
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16. Indirect Costs
DefinitionDefinition: 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.
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18. Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Material
Direct
Labor
Direct
Labor
Manufacturing
Overhead
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
21. 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
22. 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
Example: A radio installed in an
automobile
23. Direct materials
Direct 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
23
24. inDiRECt MatERial Cost
IT IS THE COST OF MATERIAL WHICH DO
NOT FORM THE PART OF PRODUCT
BUT WHICH HELP THE PRODUCTION
e.g
- LUBRICATING 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
25. Indirect materials
Such as stationery, consumable
supplies, spare parts for machine that
assist to the production of final products
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27. DiReCT LABOR
The 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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28. LABOUR COST
“The 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 are
1. Direct Labour cost
2. Indirect Labour cost
29. Direct Labor
Those labor costs that can be easily
traced to individual units of product.
Example: Wages paid to automobile assembly
workers
Example: Wages paid to automobile assembly
workers
30. Direct labour
The cost of remuneration for working
time
E.g. assembly workers’ wages in toy
assembly
30
31. Indirect labour
Such 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."
31
33. Expenses cost
“The cost of services provided to an
undertaking and the notional cost of the
use of owned assets.”
Expenses are two types
1. Direct Expenses
2. Indirect Expenses
34. Direct expenses
Other costs which are incurred for a
specific product or service
E.g. royalties
34
35. Indirect expenses
Such as rent, rates, depreciation,
maintenance expenses that do not have
instant relationships with the
manufacturing processes
35
37. The definition for overhead is easy. Here
it is......
If a cost is not direct labor or direct
materials, the cost is overhead.
37
38. Overheads
“The aggregate of Indirect material cost,
Indirect wages and Indirect expenses”
Three types such as
1. Indirect material cost
2. Indirect labour cost
3. Indirect expenses
39. Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.
Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor
40. Indirect cost (overhead)
Cost that cannot be identified
specifically with or traced to a given cost
object
They are identified with cost centres as
overheads
Indirect materials
Indirect labour
Indirect expenses
40
42. Direct Material Cost
+
Direct Labour Cost
+
Direct Expenses Cost
Indirect Material Cost
+
Indirect Labour Cost
+
Indirect Expenses
Cost
Prime Cost
Overheads
Rights reserved by Prof. Bhagyashree Kulkarni
43. Assigning Costs to Cost Objects
Direct costs
• Costs that can be
easily and
conveniently
traced to a unit of
product or other
cost object.
• Examples: direct
material and direct
labor
Indirect costs
• Costs that cannot
be easily and
conveniently
traced to a unit of
product or other
cost object.
• Example:
manufacturing
overhead
45. Cost accumulation
45
•Prime cost = direct materials + direct labour + direct expenses
•Production cost = Prime cost + factory overhead
OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into
finished product
•Total 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
46. Major Cost Elements
Direct Labor Cost
Labor Categories
Labor Rates
Labor Hours
Direct Material Cost
The Actual Materials
○ Raw material
○ Purchased parts and/or
assemblies
Subcontracts
Miscellaneous material
Discounts, Scrap,
Inventory Shrinkage, &
Freight-in
Indirect Costs
Material Handling
Fringe Benefits
Overhead (or burden)
G&A Expenses
Other Direct Costs
Nonrecurring costs
Subcontracts
Travel
Profit or Fee
Cost of Money
EscalationEscalation
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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 costs—prime 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.