Cost Account - 1 & 2
In business and accounting, the cost is the monetary value that has been spent by a
company in order to produce something. A business's cost is the money spent on producing
or creating a good or service. In accounting, the term cost refers to the monetary value of
expenditures for services, supplies, raw materials, labor, products, equipment, etc. Cost is an
amount that is recorded in bookkeeping records as an expense.
Elements of Cost
The elements of cost are those elements that constitute the cost of manufacture of a product.
We can broadly divide these elements of cost into three categories. In a manufacturing
organization, we convert raw materials into a finished product with the help of labor and
other services. These services are Material, Labour, and Expenses.
1. Direct Material
It represents the raw material or goods necessary to produce or manufacture a product. The
cost of direct material varies according to the level of output. For example, Milk is the direct
material of ghee.
2. Indirect Material
It refers to the material which we require to produce a product but is not directly identifiable.
It does not form a part of a finished product. For example, the use of nails to make a table.
The cost of indirect material does not vary in the direct proportion of the product.
3. Direct Labour
It refers to the amount paid to the workers who are directly engaged in the production of
goods. It varies directly with the level of output.
4. Indirect Labour
It represents the amount paid to workers who are indirectly engaged in the production of
goods. It does not vary directly with the level of output.
Cost Account - 1 & 2 1
, 5. Direct Expenses
It refers to the expenses that are specifically incurred by the enterprises to produce a product.
The production cannot take place without incurring these expenses. It varies directly with the
level of production.
6. Indirect Expenses
It represents the expenses that are incurred by the organization to produce a product. These
expenses cannot be easily identified accurately. For example, Power expenses for the
production of pens.
7. Overhead
It refers to all indirect materials, indirect labor, or indirect expenses.
8. Factory Overhead
Factory overhead 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 the factory, canteen expenses, etc. are examples of
factory overhead.
9. Administration Overhead
Administrative or Office Overhead refers to the expenses which are incurred in connection
with the general administration of the organization.
Salary of administrative staff, postage, telegram, telephone, stationery, etc. are examples of
administration overhead.
10. Selling Overhead
All expenses that a firm incurs in connection with sales are selling overheads. Salary of sales
department staff, travelers’ commission, advertisement, etc. are examples of selling overhead.
11. Distribution Overhead
It represents all expenses incurred in connection with the delivery or distribution of finished
goods and services from the manufacturer to the consumer. F Delivery van expenses. loading
and unloading, customs duty, and the salary of deliverymen are examples of distribution
overhead.
What Is a Direct Cost?
Cost Account - 1 & 2 2
In business and accounting, the cost is the monetary value that has been spent by a
company in order to produce something. A business's cost is the money spent on producing
or creating a good or service. In accounting, the term cost refers to the monetary value of
expenditures for services, supplies, raw materials, labor, products, equipment, etc. Cost is an
amount that is recorded in bookkeeping records as an expense.
Elements of Cost
The elements of cost are those elements that constitute the cost of manufacture of a product.
We can broadly divide these elements of cost into three categories. In a manufacturing
organization, we convert raw materials into a finished product with the help of labor and
other services. These services are Material, Labour, and Expenses.
1. Direct Material
It represents the raw material or goods necessary to produce or manufacture a product. The
cost of direct material varies according to the level of output. For example, Milk is the direct
material of ghee.
2. Indirect Material
It refers to the material which we require to produce a product but is not directly identifiable.
It does not form a part of a finished product. For example, the use of nails to make a table.
The cost of indirect material does not vary in the direct proportion of the product.
3. Direct Labour
It refers to the amount paid to the workers who are directly engaged in the production of
goods. It varies directly with the level of output.
4. Indirect Labour
It represents the amount paid to workers who are indirectly engaged in the production of
goods. It does not vary directly with the level of output.
Cost Account - 1 & 2 1
, 5. Direct Expenses
It refers to the expenses that are specifically incurred by the enterprises to produce a product.
The production cannot take place without incurring these expenses. It varies directly with the
level of production.
6. Indirect Expenses
It represents the expenses that are incurred by the organization to produce a product. These
expenses cannot be easily identified accurately. For example, Power expenses for the
production of pens.
7. Overhead
It refers to all indirect materials, indirect labor, or indirect expenses.
8. Factory Overhead
Factory overhead 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 the factory, canteen expenses, etc. are examples of
factory overhead.
9. Administration Overhead
Administrative or Office Overhead refers to the expenses which are incurred in connection
with the general administration of the organization.
Salary of administrative staff, postage, telegram, telephone, stationery, etc. are examples of
administration overhead.
10. Selling Overhead
All expenses that a firm incurs in connection with sales are selling overheads. Salary of sales
department staff, travelers’ commission, advertisement, etc. are examples of selling overhead.
11. Distribution Overhead
It represents all expenses incurred in connection with the delivery or distribution of finished
goods and services from the manufacturer to the consumer. F Delivery van expenses. loading
and unloading, customs duty, and the salary of deliverymen are examples of distribution
overhead.
What Is a Direct Cost?
Cost Account - 1 & 2 2
