Elements of cost Elements of cost are considered to arrive at a total project cost estimate.

The elements of cost are generic in nature. They are not considered as definitive examples since the accounting practices of different firms and organizations may vary greatly. The definition of the cost parameters is usually not the responsibility of one department of the organization. The main aim is to give an idea of the various components that are included in the total project cost. The elements of cost include direct materials, direct labor and expenses. Direct materials are material which can be conveniently identified with or allocated to cost centers and cost units. It refers to the material from which a product is manufactured. These materials enter into and form a part of the product. For example timber used in the manufacturing of furniture is a direct material. Direct material is a component of prime cost. Direct material directly varies with the output. Direct labor costs are costs which can be conveniently identified with or allocated to cost centers and cost units. These costs include the wages paid to the workers who actually produce goods. In case the work is done manually, it is not difficult to locate direct worker because he is the one who produces goods. Examples include wages and salaries paid to the workers. Direct expenses are the cost of services provided to an undertaking and the notional cost of the use to the owned assets. These expenses can be easily identified with or allocated to cost centers or cost units. For example the charge for hiring a special plant for production is also direct expense and it can be easily identified with and allocated to cost centers or cost units. Another example of direct expense would be the cost of preparing blue print for a production.

Elements of cost
   Material (Material is a very important part of business)  Direct material Labor  Direct labor Overhead (Variable/Fixed)           Indirect material Indirect labor Maintenance & Repair Supplies Utilities Other Variable Expenses Salaries Occupancy (Rent) Depreciation Other Fixed Expenses

(In some companies, machine cost is segregated from overhead and reported as a separate element) They are grouped further based on their functions as,      Production or works overheads Administration overheads Selling overheads Distribution overheads Financial Expenses

element of cost. It is basics in cost accounting. If you know elements of cost, you can try to collect them for finding the cost of product. Element of cost provides the complete structure in which we can identify our total cost. For example, you go to market and buy one packet of tiger biscuit by paying Rs. 5. But this price's major part is the cost of packet. Manufacturer made this packet of biscuit by purchasing its raw material, producing by the help of machines and labours and delivered you by any transport means. All these things have some cost and these cost will be element of cost in simple words.

We can divide total cost in following main elements of costs: 1. Direct Cost It is that element of cost in which we can include the cost of direct material and direct labour. If we take its total, it will be prime cost. a) Direct Material Cost Direct material is that material which we find in finished product and easily measures its cost. For example, for making furniture, woods are direct material and its cost will be the part of direct cost. b) Direct Labour Cost Direct labour is used for producing the product. We pay wages for making product to labourers and this cost will be the direct labour cost. c) Direct expenses cost Except direct material and direct labour, all direct expenses will be direct expenses cost.

2. Indirect Cost c) Overheads When we can not charge an expense directly on the product, we can say it is indirect expense or overhead. In overhead, we can include indirect material cost, indirect labour cost and other following indirect expenses.

i) manufacturing overheads ii) administrative overheads iii) selling overheads iv) research and development cost Factory rent and rates, insurance of plants or telephone bill are the main examples of overheads.