Elements of costs – material costs, labour costs, expenses

The elements of costs are those elements that constitute the cost of the manufacture of a product. The cost of an industrial enterprise may be divided into three principal elements,

  1. Material cost,
  2. labour cost,
  3. expense.

Let’s understand each of elements in details.

What you are going to learn?

1 Material cost

It is the cost of commodities supplied to an undertaking. Material costs are two types direct material cost, and Indirect material cost.
Direct Material 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 butter.
The amount of money spent on direct materials is known as direct material cost.
Since direct material used can be traced to a specific product and its cost become part of the prime cost.
Indirect material cost, An indirect material is one that is necessary for the production process but it’s not directly used in the product itself, which means it does not become an integral part of the product. Exp- cotton waste, sandpaper, oil, greases, etc. The cost associated with indirect materials is called indirect material cost. The same material may be direct material for one producer and an indirect
material for another.
In certain cases, some direct materials are used so little that it is not worthwhile to charge them as direct materials.
In such conditions, these materials are charged as indirect materials or overheads.

2 Labour cost

Labour cost is the cost of salaries, wages, the bonus of the employees of a company.
Labour cost is also divided into two portions:

  • Direct labour cost, and
  • Indirect labour cost.

Direct labour cost is the cost of labour directly engaged in production operations. E.g., workmen engaged in assembling parts, carpenters engaged in
furniture making, etc.

Indirect labour cost is the remuneration paid for labour engaged to help the production operations, e.g., inspectors, watchmen, sweepers, storekeepers, etc. The remuneration paid to these persons cannot be traced to a job process or production order. The labour costs of idle time, overtime, holidays, etc., are also taken as indirect costs. Similarly, clerical and managerial staff, salesmen, distribution employees are also included in the orbit of ‘indirect labour’.

3 Expenses

Expense is The cost of service provided to an undertaking and the theoretical cost of the use of owned assets. In an easy word, expenditure other than labour and material is called expenses.
Expense are two types

  1. direct expense, and
  2. Indirect expense.

Direct expenses are the expenses that can be directly identified with a unit of output, job, process or operation. They are specifically incurred for a job, or
unit or process and in no way they are connected with other jobs or processes.
For example, the Cost of special patterns designs or plans for a particular job or work order.
Indirect expenses are expenses other than indirect material and indirect labour, which cannot be directly identified with units of output, job, process or
operation. These expenses are incurred commonly for jobs and processes. E.g.,
rent, power, lighting, depreciation, bank charges, advertising, etc.

Sukanta Maiti

I am a Mechanical Engineer by profession, Blogger, and Youtuber by passion. I have been in the engineering field since 2014. I am passionate about sharing all my knowledge about engineering, management, and economics to my readers.

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