COST

COST: It may be defined as the

monetary value of all sacrifices
made to achieve an objective (i.e. to
produce goods and services)

S.K.SONI

The Meaning of Cost?

Product
ProductCosts
Costs
The
Thecost
cost
assigned
assignedto
to
goods
goodsthat
thatwere
were
either
eitherpurchased
purchased
or
ormanufactured
manufactured
for
forresale.
resale.

The
The sacrifice
sacrifice
made,
made,usually
usually
measured
measured by
bythe
the
resources
resourcesgiven
given
up,
up,to
toachieve
achieveaa
particular
particular
purpose.
purpose.

S.K.SONI

Period
PeriodCosts
Costs
Costs
Coststhat
thatare
are
identified
identifiedwith
with
the
theperiod
periodin
in
which
whichthey
theyare
are
incurred.
incurred.

COSTING

Costing is simply cost finding.

It may be defined as the technique and
processes of ascertaining costs.
Costing is classifying, recording and
appropriate allocation of expenditure for
the cost determination of the product or
services

S.K.SONI

ELEMENTS OF COST
There
There are
are 33 major
major elements
elements of
of costs:
costs:

Materials
Materials
commodities
commodities
supplied
suppliedto
to
undertaking.
undertaking.

Labour
Labour

Expenses
Expenses

The
Thecost
costof
of
paying
payingemployees
employees
includes
includessalaries,
salaries,
bonus,
bonus,etc.
etc.

Cost
Costother
other than
than
material
material&&
labour
labour

S.K.SONI

ELEMENTS OF COST
There are 3 major
elements of costs

MATERIAL

Direct
Material

Indirect
Material

LABOUR

Direct
Labour

Direct
Labour

S.K.SONI

EXPENSES

Direct
Expenses

Indirect
Expenses

MATERIAL
Cost of commodities supplied to an
undertaking.

DIRECT MATERIAL:
Generally becomes a part of finished product.
e.g. fibre, for spinning Mill, sugarcane for sugar
factory.
INDIRECT MATERIAL:
Necessary in production process but not
become integral part of product.
e.g. Oil, Grease, sand paper,

S.K.SONI

LABOUR
Cost of remuneration (expenses on wages) includes
salaries, bonuses

DIRECT LABOUR
Wages paid to employees engage in converting raw
material into finished product.
e.g. sider,
INDIRECT LABOUR
Wages paid to employees those who are not engage
in production process.
e.g. Security Guards.

S.K.SONI

EXPENSES
All the cost other than material and labour are
termed as expenses.
DIRECT EXPENSES
Expenses which are specifically incurred on particular
job/product.
e.g. Power, design cost, etc.

INDIRECT EXPENSES
All the indirect cost other than indirect material and
indirect labour are termed as indirect expenses.
e.g. Telephone bill, Rent, Insurance, etc.

S.K.SONI

PRIME COST
PRIME COST

DIRECT
MATERIAL

DIRECT
LABOUR

S.K.SONI

DIRECT
EXPENSES

OVERHEADS
OVERHEADS

INDIRECT
MATERIAL

INDIRECT
LABOUR

S.K.SONI

INDIRECT
EXPENSES

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OVERHEADS
OVERHEADS

PRODUCTION
OVERHEAD

OFFICE & ADMN.

OVERHEAD

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SELLING & DIST.

OVERHEAD

11

TOTAL
COST

PRIME COST

OVERHEADS
Direct Material
Indirect Material
Direct Labour

Indirect Labour

Direct Expenses

Indirect Expenses

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12

Manufacturing Companies
Prime
Prime Costs
Costs include:
include:
Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor

S.K.SONI

Direct
Direct
Expenses
Expenses

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Manufacturing Companies
Factory
Factory Costs
Costs include:
include:

Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor

Direct
Direct
Expenses
Expenses

+
Production
Overhead
S.K.SONI

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Manufacturing Companies
Cost
Cost of
of Production
Production include:
include:
Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor
+

Direct
Direct
Expenses
Expenses

Production
Overhead

+
Office & Admn.
Overheads

S.K.SONI

15

Manufacturing Companies
Cost
Cost of
of sales
sales include:
include:

COST
COST OF
OF PROD
PROD

S.K.SONI

SELLING
SELLING&&DIST.
DIST.
OVERHEADS
OVERHEADS

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Materials
Materials

Labour
Labour

direct
directlabor
labor

direct
directmaterial
material

Indirect
Indirect
material
material

Indirect
Indirectlabor
labor

direct
directexp
exp

S.K.SONI

Expenses
Expenses

Indirect
Indirectexp
exp

17