Cost accounting M.

Vijayasekaram elements of costs

S.V.C.R.GDC

Elements of Cost in Cost Accounting

The elements that constitute the cost of manufacture are known as the
elements of cost. Such element of cost is divided into three categories. In
a manufacturing concern, raw materials are converted into a finished
product with the help of labor and other service units. They are Material,
Labour and Expenses.
Elements of Cost in Cost Accounting
Again, these elements of cost are divided into two categories such
as Direct Material and Indirect Material, Direct Labour and Indirect
Labour, Direct Expenses and Indirect Expenses. All direct material,
direct labour and direct expenses are added to get prime cost. Likewise
all indirect material, indirect labour and indirect expenses are added to
get overhead. Again, overhead is divided into four categories. They are
factory overhead, administration overhead, selling overhead and
distribution overhead.
1. Direct Material: It refers to material out of which a product is to be
produced or manufactured. The cost of direct material is varying
according to the level of output. For example: Milk is the direct material
of butter.
2. Indirect Material: It refers to material required to produce a product
but not directly and does not form a part of a finished product. For
example: Nails are used in furniture. The cost of indirect material is not
varying in direct proportion of 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
output.
4. Indirect Labour: It refers to the amount paid to the workers who are
indirectly engaged in the production of goods. It does not vary directly
with the output.
5. Direct Expenses: It refers to the expenses that are specifically
incurred by the company to produce a product. A product cannot be
produced without incurring such expenses. It varies directly with the
level of output.
Cost accounting M.Vijayasekaram elements of costs
S.V.C.R.GDC

6. Indirect Expenses: It refers to the expenses that are incurred by the

organization to produce a product. But, these expenses cannot be easily
found out accurately. For example: Power used for production.
7. Overhead: It is the combination of all indirect materials, indirect
labour and indirect expenses.
8. Factory Overhead: It is otherwise called Production Overhead or
Works Overhead. It refers to the expenses that are incurred in the
production place or within factory premises. For example: Indirect
material, rent, rates and taxes of factory, canteen expenses etc.
9. Administration Overhead: It is otherwise called Office Overhead. It
refers to the expenses that are incurred in connection with the general
administration of the company. For example: Salary of administrative
staff, postage, telegram and telephone, stationery etc.
10. Selling Overhead: It refers to all expenses incurred in connection
with sales. For example: Salary of sales department staff, travelers’
commission, advertisement etc.
11. Distribution Overhead: It refers to all expenses incurred in
connection with the delivery or distribution of goods and services from
the producer to the consumer. For example: Delivery van expenses.
Loading and unloading, customs duty, salary of deliverymen etc.
Material Control: Meaning, Objectives,
Meaning:
Material control is the main component of the process of material
management.

Control over materials is of utmost importance for smooth and

uninterrupted functioning of an organisation.

A few definition of the term are given as under:

“Material control is a systematic control over purchasing, storing and
consumption of materials, so as to maintain a regular and timely supply
of materials, at the same time, avoiding overstocking.”
Cost accounting M.Vijayasekaram elements of costs
S.V.C.R.GDC

“Material control refers to the management function concerned with

acquisition, storage, handling and use of materials so as to minimise
wastage and losses, derive maximum economy and establish
responsibility for various operations through physical checks, record
keeping, accounting and other devices. ”

The main objectives of material control may be given as follows:

(i) To Ensure Un-interrupted Production:

The first objective of material control is to ensure smooth production by

making available all types of required materials in the required quantity
at the right time. Un-interrupted supply of materials is essential for the
smooth flow of production which is important for the success of
any business.
(ii) To Provide for Required Quality of Materials:
The second objective of material control is to ensure the availability of
all types of materials of the required quality. If the quality of the
materials is not proper, it will affect the quality of the product, which in
its turn is bound to affect the reputation and sale of the business concern.
(iii) To Minimize Wastages and Losses of Materials:
Material control system also aims at controlling or minimizing all types
of wastages and losses of materials which may arise due to carelessness
in the storing, issuing and handling of materials.
(iv) To Control Investment in Stock of Materials:
Material control system also aims at minimizing the capital investment
in the stock of materials. Materials are purchased and stored before the
actual production commences. A large amount of capital may be locked
up in materials which may not be required at that time. Similarly,
sometimes there may be under-investment in materials leading to
interruptions in production due to non-availability of the required
Cost accounting M.Vijayasekaram elements of costs
S.V.C.R.GDC

quantity of materials. Efficient material control system helps in ensuring

optimum investment of capital in the purchase of materials.
Advantages Of Material Control System
The main advantages of a good system of material control may be
summarised as follows:
1. It helps in preventing production delays due to lack of materials by
ensuring regular supply of proper quantities of materials at the
right time.
2. It helps in ensuring the production of proper quality by ensuring
the purchase of materials of proper quality.
3. It helps in eliminating wastage in the use of materials.
4. It reduces the risk of loss from fraud and theft.
5. It reduces the cost involved in the storing and issuing of materials.
6. It minimizes the capital investment in the stock of materials.
7. It furnishes quickly and accurately the value of materials used in
various departments.
8. It helps in keeping perpetual inventory and other records to
facilitate the preparation of accurate material reports.