Elements of Cost

Unit - 2
 Direct

Material
Indirect

Elements of Cost
Direct

Labour
Indirect

Direct

Expenses
Indirect
 Material

As per CIMA, London: “Material Cost is the cost

of commodities supplied to an undertaking.”
Direct Material:
“Costs that can be conveniently identified with and allocated to cost
units.”
Eg: cotton used in textile mill, wood used in furniture

Indirect Material:
“Costs that cannot be conveniently identified with and allocated to
cost units.”
Eg: thread used in garments, nail or screws used in furniture
 Labour

As per CIMA, London: “Labour Cost is the cost of

remuneration of the employees of an undertaking.”

Direct Labour:
Consist of wages paid to workers who are directly involved in
production.
Eg: wages paid to a machine operator

Indirect Labour:
Remuneration paid to staff who are not directly involved in
production, but only assist the operations.
Eg: salary of the administrative manager.
 Expenses
As per CIMA, London: “Cost of services provided to an
undertaking.” In short, all costs other than material
and labour.
Direct Expenses:
“Costs that can be conveniently identified with and allocated to cost
centers or cost units.”
Eg: Hire of special plant, Cost of Patent, Cost of Design

Indirect Expenses:
“Costs that cannot be conveniently identified with a particular job,
process or work order and are common to cost units and centers.”
Eg: Rent, Lighting, Advertising, Insurance
Classification of Costs
 Special Types of Costs
• Expenditure made in the past that cannot be changes and
Sunk Costs management has no control over it.
• Not relevant for decision making in the future.

Differential / • Difference in total cost resulting from a anticipated change.

• Increase or decrease in total cost due to an alternative course of
Incremental Costs action.

• Cost of producing 1 additional unit.

Marginal Cost • Also known as variable cost.
• Important analytical decision making tool.

• Sacrifice involved in accepting an alternative under consideration.

Opportunity Cost • Measures the benefit that is lost when choice of 1 action requires
giving up of another
 Cost Sheet
A document which provides detailed costs involved in a cost center.