CLASSIFICATION OF COSTS (BY NATURE OR ELEMENT)

CLASSIFICATION OF COSTS

 By Nature or Element

(i) Direct Materials: Materials which are present in the finished product(cost object) or can be economically identified in the product are called direct materials. For example, cloth in dress making; materials purchased for a specific job etc. However, in some cases a material may be direct but it is treated as indirect, because it is used in small quantities, it is not economically feasible to identify that quantity and those materials which are used for purposes ancillary to the business.

(ii) Direct Employee (Labour): Labour which can be economically identified or attributed wholly to a cost object is called direct labour. For example, employee engaged on the actual production of the product or in carrying out the necessary operations for converting the raw materials into finished product.

(iii) Direct Expenses: It includes all expenses other than direct material or direct labour which are specially incurred for a particular cost object and can be identified in an economically feasible way. For example, hire charges for some special machinery, cost of defective work.

(iv) Indirect Materials: Materials which do not normally form part of the finished product (cost object) are known as indirect materials. These are —

• Stores used for maintaining machines and buildings (lubricants, cotton waste, bricks etc.)

• Stores used by service departments like power house, boiler house, canteen etc.

(v) Indirect Labour: Labour costs which cannot be allocated but can be apportioned to or absorbed by cost units or cost centres is known as indirect labour. Examples of indirect employees include foreman and supervisors; maintenance workers; etc.

(vi) Indirect Expenses: Expenses other than direct expenses are known as indirect expenses, that cannot be directly, conveniently and wholly allocated to cost centres. Factory rent and rates, insurance of plant and machinery, power, light, heating, repairing, telephone etc., are some examples of indirect expenses.

(vii) Overheads: It is the aggregate of indirect material costs, indirect labour costs and indirect expenses. The main groups into which overheads may be subdivided are the following:

• Production or Works Overheads: Indirect expenses which are incurred in the factory and for the running of the factory. E.g.: rent, power etc.

• Administration Overheads:Indirect expenses related to management and administration of business. E.g.: office rent, lighting, telephone etc.

• Selling Overheads: Indirect expense incurred for marketing of a commodity. E.g.: Advertisement expenses, commission to sales persons etc.

• Distribution Overheads: Indirect expense incurred to despatch of the goods E.g.: warehouse charges, packing and loading charges.