Exercises · Q10
Q.What are the elements of cost? Explain each with examples, and show how prime cost and overheads are made up.
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Start your 14-day free trial to unlock the full solution →When cost is classified by nature, it falls into three elements — material, labour and expenses — and each is further divided into a direct and an indirect part.
1. Material cost.
- Direct material — material that becomes part of the finished product and can be traced to it: 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: glue, nails, lubricating oil, cleaning materials.
2. Labour cost.
- Direct labour — wages of workers directly engaged in converting material into the product, whose time is traceable to a job: a machine operator, a carpenter, a weaver.
- Indirect labour — wages of those who assist production without working on the product directly: supervisors, storekeepers, maintenance staff, cleaners.
3. Expenses.
- Direct expenses (chargeable expenses) — expenses other than direct material and labour that are traceable to a job: hire of a special machine for one job, royalty per unit, cost of a special design for one order.
- Indirect expenses — all other expenses not traceable to a unit: factory rent, insurance, depreciation, lighting and power.
Building up prime cost and overheads. The three direct elements together form the prime cost:
Prime cost = Direct material + Direct labour + Direct expenses.
The three indirect elements together form the overheads:
Overheads = Indirect material + Indirect labour + Indirect expenses, …
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