Cost Accounting - Components - Elements of Cost - M.Com
There
are three components of Costs which are very important in the manufacturing of products
These are the basis of the costs on which entire production are produced for
the firm.
1. Material
2. Labor
3. Expense
1. Material
The substance from which the
finished product is made is known as material.
OR
Material means those
components or commodities which are utilized during production.
Material is
divided into two types:
1. Direct
Material
2. Indirect
Material
1. Direct Material
A material is
direct only and only if it follows three conditions:
i. It is an essential part of the
product
ii. It is visible
iii. It consists major part of the
product
Examples
1. In case of Shoes, leather is direct material as it is essential
part of the product because without leather we can not make shoes. Also, it is
visible most part of the shoes. And, finally, It consists major part of the
shoes. Other parts of the shoes are indirect materials like thread and needle.
2. In case of Shirt, Cotton is direct material.
3. In case of building, cement, sand, bricks and others are direct
material.
2. Indirect Material
IS one
which can not be easily identified in the product.
2. Labor
Labor means all human efforts of body or mind which are undertaken
for material reward.
OR
The human effort required to convert the material into finished
product is called labor.
Example
Bonus paid to employees is treated as Labor.
Labor is divided into two types:
1. Direct
Labor
2. Indirect
Labor
1. Direct
Labor
Employees or workers
who are directly involved in the production of goods or services.
OR
IS one which can be conveniently identified
or attributed wholly to a particular job, product or process. E.g. Wages paid
to carpenter.
2. Indirect Labor
Employees or workers (such as accountants, supervisors, security
guards) who do not directly produce goods or services, but who make their
production possible or more efficient.
Examples
1. In case of Bus
driving, driver is the direct labor and conductor is indirect labor.
2. In case of
weaving, Tailor is the direct labor. Other helpers are indirect labor.
3. In case of
Hospitals, Doctor is the direct labor, nurses are indirect labor.
4. In case of
Education institution, Teacher is the direct labor; all other staff are
indirect labor.
3. Expense
Expense is outflow of money to another person
or group to pay an item or service or for a category of costs. Expense is
divided into two types:
1. Direct Expense
2. Indirect Expense
1. Direct Expense are those expenses which can be directly
allocated to particular job, process or product. E.g: excise duty, royalty,
special hire charges.
There are only two direct
expenses which are as follows:
i. Purchase
of special Tools or equipment for a special purpose
ii. Loyalty
2.
Indirect
Expenses are
those expenses which cannot be directly allocated to particular job, process or
product.
OR
Indirect
expenses are those expenses which are incurred after the manufacturing of
goods.
Examples
Utility
bills, machinery repairs, factory expenses, etc.
Important Points
Ø The Cost of Direct Material and Direct Labor is always variable.
Ø Total Production = Sum of Material, Labor and Expense
Ø Direct Production Cost = Direct Material + Direct Labor + Direct
Expense
Ø Indirect Production/Factory Overheads = Indirect Material +
Indirect Labor + Indirect Expense
Ø Non-Production Cost = Administrative Costs + Selling Costs +
Distribution Costs
Import Definitions
Appraisal costs
Costs that are incurred to identify defective products
before the products are shipped to customers.
External failure costs
Costs that are incurred when a product or service that
is defective is
delivered to a customer.
Internal failure costs
Costs that are incurred as a result of identifying
defective products before they are shipped to customers.
Prevention costs
Costs that are incurred to keep defects from occurring.
Quality circles
Small groups of employees that meet on a regular basis
to discuss ways of improving quality.
Quality cost
Costs
that are incurred to prevent defective products from falling into the hands of customers
or that are incurred as a result of defective units.
N B U S I
Quality cost report
A report that details prevention costs, appraisal
costs, and the costs of internal and external failures.
Quality of conformance
The degree to which a product or service meets or exceeds its design specifications and is free of defects or other problems that mar its appearance or degrade its performance.
Students resources for Cost Accounting Book can be get from the
given below link
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