Cost Accounting Basic Concepts
The term ‘cost’ means the amount of expenses [actual or notional] incurred on or attributable to specified thing or activity.
As per Institute of Cost and Work Accounts (ICWA) India, Cost is ‘measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services.'
ELEMENTS OF COST
Cost of production/manufacturing consists of various expenses incurred on production/manufacturing of goods or services. These are the elements of cost which can be divided into three groups : Material, Labour and Expenses
Material
For production of goods and even in some cases rendering of services, material is needed. This material can be in the form of Raw material or finished goods. As discussed in class a majority of the products in the world that you see are a result of assembly- from the ball point pen in your hand to the expensive handset.
This in turn can be classified as direct material or indirect material
As the name indicates direct material is the material that can be directly identified and related to a specific product, production process or activity
Wood is raw material for making different types of furniture, sugarcane for making sugar are some such examples
Indirect material on the other hand cannot be directly identified and related to a specific product, production process or activity.Consumables, oil for machine, grease, printing and stationery items are some of the popular examples. packing material for the finished product is another example.
Labour too can be divided into direct and indirect labour.
Direct Labour takes direct and active part in the production. It can be easily linked and identified to a particular product, job, process and /or activity.
It varies with the volume of production.
Cost of wages paid to carpenter for making furniture, cost of a tailor in producing readymade garments are some examples.
Indirect Labour
Indirect labour is that labour which can not be easily identified and related with specific product, job, process, and activity. It includes all labour not directly engaged in converting raw material into finished product. It may or may not vary directly with the volume of output. Wages of store-keepers, time-keepers, salary of works manager, salary of sales staff are some examples
Expenses
All costs other than that incurred for material or overheads are expense. Again this can be divided into direct and indirect expenses.
Direct expenses
These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units. All direct cost other than direct material and direct labour are termed as direct expenses.
Examples of the direct expenses are hire of special machinery, cost of special designs, moulds or patterns, feed paid to architects, surveyors and other consultants, inward carriage and freight charges on special material, Cost of patents and royalties
As per Institute of Cost and Work Accounts (ICWA) India, Cost is ‘measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services.'
ELEMENTS OF COST
Cost of production/manufacturing consists of various expenses incurred on production/manufacturing of goods or services. These are the elements of cost which can be divided into three groups : Material, Labour and Expenses
Material
For production of goods and even in some cases rendering of services, material is needed. This material can be in the form of Raw material or finished goods. As discussed in class a majority of the products in the world that you see are a result of assembly- from the ball point pen in your hand to the expensive handset.
This in turn can be classified as direct material or indirect material
As the name indicates direct material is the material that can be directly identified and related to a specific product, production process or activity
Wood is raw material for making different types of furniture, sugarcane for making sugar are some such examples
Indirect material on the other hand cannot be directly identified and related to a specific product, production process or activity.Consumables, oil for machine, grease, printing and stationery items are some of the popular examples. packing material for the finished product is another example.
Labour too can be divided into direct and indirect labour.
Direct Labour takes direct and active part in the production. It can be easily linked and identified to a particular product, job, process and /or activity.
It varies with the volume of production.
Cost of wages paid to carpenter for making furniture, cost of a tailor in producing readymade garments are some examples.
Indirect Labour
Indirect labour is that labour which can not be easily identified and related with specific product, job, process, and activity. It includes all labour not directly engaged in converting raw material into finished product. It may or may not vary directly with the volume of output. Wages of store-keepers, time-keepers, salary of works manager, salary of sales staff are some examples
Expenses
All costs other than that incurred for material or overheads are expense. Again this can be divided into direct and indirect expenses.
Direct expenses
These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units. All direct cost other than direct material and direct labour are termed as direct expenses.
Examples of the direct expenses are hire of special machinery, cost of special designs, moulds or patterns, feed paid to architects, surveyors and other consultants, inward carriage and freight charges on special material, Cost of patents and royalties
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