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| COST MANAGEMENT - Elements of Cost |
(i) Collection of expenditure or cost data,
(iii) Classification of expenditure as per cost elements, function, etc. and
(iii) Allocation and apportionment of expenditure to the cost centres and cost units.
The system accumulates and classifies expenditure according to the elements of costs, and then, the accumulated expenditure is allocated and apportioned to cost objects i.e. cost centres and cost units. We should, therefore, know what are cost elements, cost centres and cost units.
Elements of Cost
For the purpose of identification, accounting and control, breakup of cost into its elements is essential. Elements are related to the process of manufacture i.e. the conversion of raw materials into finished products. Costs are normally broken down into three basic elements, namely, material, labour and expense. Material cost includes all materials consumed in the process of manufacture up to the primary packing. Labour cost includes all remuneration paid to the staff and workmen for conversion of raw materials into finished products. Expenses consist of the cost of utilities and services used for the conversion process including notional cost for theuse of owned assets.
Each of the cost elements can be further divided into direct and indirect cost. Direct costs are those which can be identified with or related to the product or services, so much so that an increase or decrease of an unit of product or service will affect the cost proportionately. Indirect cost, on the other hand, cannot be identified or traced to a given cost object in economical way and are related to the expenses incurred for maintaining facilities for such production or services. Thus, the elements of cost may be summarised as follows –
(a) Direct materials and indirect materials,
(b) Direct wages and indirect wages,
(c) Direct expense and indirect expense
The aggregate of direct materials cost, direct wages and direct expense is called Prime cost, while indirect materials cost, indirect wages and indirect expenses are collectively called overhead cost. Overheads are classified into production overheads i.e. indirect costs relating to manufacturing activities, administration overheads i.e. costs relating to formulating the policy, directing the organisation and controlling operations and selling and distribution overheads i.e. indirect costs relating to the activity of creating and stimulating demand and securing orders as well as operations relating to distribution of goods from factory warehouse to customers.
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