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Cost Elements:
The total cost of a cost unit is made up of the following three elements of cost.
1. Materials
2. Labour
3. Other expenses (such as rent and rates, interest charges and so on)
(a) Direct material costs are the costs of materials that are known to have been used in making and selling a
product (or providing a service).
(b) Direct labour costs are the specific costs of the workforce used to make a product or provide a service.
Direct labour costs are established by measuring the time taken for a job, or the time taken in 'direct
production work'.
(c) Other direct expenses are those expenses that have been incurred in full as a direct consequence of
making a product, or providing a service, or running a department.
Prime cost = Direct Material cost + Direct Labour Cost + Direct Expenses
Prime cost is the 'total of direct material, direct labour and direct expenses'.
Direct material is all material becoming part of the product (unless used in negligible amounts and/or having
negligible cost).
Direct wages are all wages paid for labour (either as basic hours or as overtime expended on work on the product
itself).
(a) Workers engaged in altering the condition, conformation or composition of the product.
(b) Inspectors, analysts and testers specifically required for such production.
Direct expenses are any expenses which are incurred on a specific product other than direct material cost and
direct wages. Direct expenses are also referred to as chargeable expenses.
Examples of indirect costs might be the cost of supervisors' wages on a production line, cleaning materials and
buildings insurance for a factory.
A- Production Overhead
Production (or factory) overhead includes all indirect material cost, indirect wages and indirect expenses incurred
in the factory from receipt of the order until its completion, including:
(b) Indirect wages, meaning all wages not charged directly to a product.
(c) Indirect expenses (other than material and labour) not charged directly to production
B- Administration overhead
Administration overhead is all indirect material costs, wages and expenses incurred in the direction, control and
administration of an undertaking, including:
D- Distribution overhead
Distribution overhead is all indirect material costs, wages and expenses incurred in making the packed product
ready for despatch and delivering it to the customer, including:
Summary
A product cost is a 'cost of a finished product built up from its cost elements'.
A period cost is a 'cost relating to a time period rather than to the output of products or services'.