Elements of costs

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classification of cost
 Classification of Cost
1.Materials
2.Labour (essential wages / salaries costs)
3.Other expenses

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Elements of costs
 The three main resources categories in classification of
cost can be divided into more detailed breakdown of
cost , This is known as Elements of cost.

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Elements of costs
1. Direct Materials
2. Direct Labour
3. Direct Expenses

Prime Cost
+
1. Indirect materials
2. Indirect Labour
3. Indirect Expenses

Factory Overhead
= Production Cost
+
Selling & Distribution
+
Admin & Finance

=Total Cost
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Direct Cost
 Direct cost: Cost incurred by increasing the value of a
product .
 (only variable cost—labour , material sales
communication
1. Direct material
2. Direct Labor
3. Direct expenses

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 Direct Cost
 Direct material is the actual cost of the materials that will
make up the finished product.
 Direct Labor is the wages of those employees who actually
manufacture the finished product.
 Direct expenses are expenses that are incurred without
which a specific product could not be made. They only
relate to that specific product. The most imp example in the
clothing industry would be the royalties i.e. payment made
to designer or a payment made to use a specific motif on a
garment.
** The Sum of the direct cost is known as PRIME
COST.

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Direct Cost
 Direct Materials
1. Fabrics
2. Buttons
3. Threads
4. Zips
5. Trimmings
6. Velcro
7. Packing material & etc.

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Direct Cost
 Direct Labor
1. Cutting room—Persons involved in Spreading,
Cutting, Bundling ,Ticketing , fusing & helpers etc
2. Sewing room—Operators & Feeding helpers
3. Post Sewing—Button & Button hole , Over- lock ,
Checkers
4. Washing Dept—Persons in checking , washing
,Hydro extract , drying & segregations,
5. Finishing dept-Persons in Checking ,Iron, folding &
packing

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Indirect cost
 Indirect cost: cost not associated with specific unit of
production.

1. Indirect materials
2. Indirect labor
3. Indirect expenses

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Indirect costs
 Indirect materials are those materials used in the
factory which do not require for the finished product

 Indirect labor means wages & salaries paid to the

employees will be in factory bit do Not make finished
product.

 Indirect expenses are all other factory expenses.

 **The sum of indirect costs are known as the factory

overheads (Manufacturing Overheads).

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Indirect costs
 Indirect Expenses
1. Building Rents & Rates
2. Electricity power
3. Water charges
4. Cleaning & Maintenance
5. Transportations
6. Boiler & other maintenance
7. Telephone
8. Wear & Tear of the machines.

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 Production Cost
Prime cost(Direct cost) + Factory Overhead(Indirect cost)

= Production cost
The sum of the prime cost & the factory overhead is the
production cost.

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Total Cost—Elements of Costs
Other overhead cost in addition to production cost
 Selling + distribution costs ,
 Selling & distribution overhead
-----------------------------------------------------------------
 Administration +Finance cost
 Administration +Finance overhead
-----------------------------------------------------------------
Production cost+ Selling & distribution
overhead+ Administration +Finance
overhead = Total cost
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Costs
 Costs can also be analyzed in terms of how they
behave.
 Fixed cost &
 Variable costs

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Fixed Costs or Non variable cost
 Fixed Costs are those costs in a business that are not
affected to the business.
 Or
 Non variable cost: cost that remain unchanged despite
changes in volume ( rent , salaries, depreciation
insurance tax & security), These are normally fixed for
the year.
 The cost are often referred to as Period Costs, because
they relate to a period of time.

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Variable costs
 Variable costs are costs that increases with the output
of the garments.
 Or
 Variable cost : Cost that increases or decrease in direct
proportion to a change in the volume of production,
m/c parts .
 Direct material is the good example of a variable cost
of the garment factory, Cost increases with output of
garments.

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Semi variable Costs

 Some cost do not fit neatly into Fixed / Variable costs

& these are known as SEMI-VARIABLE (or Semi-Fixed)
Costs,
 Example
 Electric charges are semi variable,
 The standing charge s is the fixed cost elements but
the units consumed could be linked to the output of
the factory & their charges could be considered a
Variable cost elements,

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