Elements of Cost

When cost is classified by nature, it falls into three basic elements — material, labour and expenses — and each of these is further divided into a direct and an indirect part. These elements are the building blocks from which every cost figure, and the cost sheet itself, is assembled.

1. Material cost

• Direct material — material that becomes a part of the finished product and can be conveniently traced to it: for example timber in furniture, cloth in a garment, steel in a machine part.
• Indirect material — material used in production but not conveniently traceable to a single unit, or used in such small amounts that tracing it is not worthwhile: glue, nails, cleaning materials, lubricating oil.

2. Labour cost

• Direct labour — the wages of workers who are directly engaged in converting raw material into the finished product and whose time can be traced to a job or product: a machine operator, a carpenter, a weaver.
• Indirect labour — the wages of those who assist production without working on the product directly: supervisors, foremen, storekeepers, maintenance staff, cleaners.

3. Expenses

• Direct expenses (chargeable expenses) — expenses, other than direct material and direct labour, that can be traced directly to a particular job or product: the hire of a special machine for one job, royalty paid per unit produced, the cost of a special design or pattern made for one order.
• Indirect expenses — all other expenses that cannot be traced to a single unit: factory rent, rates, insurance, depreciation, lighting and power.

Direct costs and overheads. The three direct elements added together — direct material + direct labour + direct expenses — form the prime cost. The three indirect elements added together — indirect material + indirect labour + indirect expenses — form the overheads, which are themselves grouped by function into factory (works) overheads, office and administration overheads, and selling and distribution overheads. The whole structure can be summarised as:

| Element | Direct part | Indirect part (overhead) |

|---|---|---| …