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Elements of Cost

The document outlines the elements of cost in manufacturing, categorizing them into Material, Labour, and Expenses, with further subdivisions into direct and indirect costs. It explains how to calculate prime cost, overhead costs, and the selling price of a product through a series of formulas. Additionally, it discusses concepts such as marginal cost, marginal revenue, sunk cost, and opportunity cost.

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bashir almarmy
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15 views8 pages

Elements of Cost

The document outlines the elements of cost in manufacturing, categorizing them into Material, Labour, and Expenses, with further subdivisions into direct and indirect costs. It explains how to calculate prime cost, overhead costs, and the selling price of a product through a series of formulas. Additionally, it discusses concepts such as marginal cost, marginal revenue, sunk cost, and opportunity cost.

Uploaded by

bashir almarmy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Engineering

Economy
Elements of cost

By . Basher almarmy
Fall, 2022- 2023
Elements of cost
• The elements of cost are those elements which constitute the cost of
manufacture of a product. We can broadly divide these elements of cost
into three categories. . These services are Material, Labour and
Expenses.
• we can bifurcate these elements of cost into two categories such as
Direct Material and Indirect Material, Direct Labour and Indirect Labour,
Direct Expenses and Indirect Expenses. We need to add all direct
material, direct labor, and direct expenses to calculate the prime cost.
• we add all indirect material, indirect labour, and indirect expenses to
calculate the overhead cost. Again, we can bifurcate the overheads into
four categories. They are factory overhead, administrative overhead,
selling overhead and distribution overhead.
Elements of cost
• Direct Material
It represents the raw material or goods necessary to produce or manufacture a
product. example, Milk is the direct material of ghee.
• Indirect Material
It refers to the material which we require to produce a product but is not directly
identifiable, example, the use of nails to make a table. The cost of indirect
material does not vary in the direct proportion of product.
• Direct Labour
It refers to the amount which paid to the workers who are directly engaged in
the production of goods
• Indirect Labour
It represents the amount paid to workers who are indirectly engaged in the
production of goods
• Direct Expenses
It refers to the expenses that are specifically incurred by the enterprises to
Elements of cost
• Indirect Expenses
It represents the expenses that are incurred by the organization to produce a
product. example, Power expenses for the production of pens.
• Overhead
It refers to all indirect materials, indirect labour, or and indirect expenses.
• Factory Overhead
Factory overhead or Production Overhead or Works Overhead refers to the
expenses which a firm incurs in the production area or within factory premises.
Indirect material, rent, rates and taxes of factory, canteen expenses etc.are
example of factory overhead.
• Administration Overhead
Administrative or Office Overhead refers to the expenses which are incurred in
connection with the general administration of the organizations Salary of
administrative staff, postage, telegram and telephone, stationery etc.are
examples of administration overhead.
• Selling Overhead
Elements of cost

• Distribution Overhead
• It represents all expenses incurred in connection with the delivery
or distribution of finished goods and services from the
manufacturer to the consume
Elements of cost
• The selling price of a product is derived as :

(a) Direct material costs + Direct labour costs + Direct expenses = Prime cost

(b) Prime cost + Factory overhead = Factory cost

(c) Factory cost + Office and administrative overhead = Costs of production

(d) Cost of production + Opening finished stock – Closing finished stock = Cost of goods sold

(e) Cost of goods sold + Selling and distribution overhead = Cost of sales

(f) Cost of sales + Profit = Sales

(g) Sales/Quantity sold = Selling price per unit


Elements of cost
• Other Costs/Revenues

• Marginal Cost
Marginal cost of a product is the cost of producing an additional unit of that product
• Marginal Revenue
Marginal revenue of a product is the incremental revenue of selling an additional
unit of that product.
• Sunk Cost
This is known as the past cost of an equipment/asset.
• Opportunity Cost
the opportunity cost of an alternative is the return that will be foregone by not
investing the same money in another alternative.
Thank you

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