COST

According to Oxford dictionary, cost implies

the price paid for something.
Definitions
Cost is the amount of expenditure (actual or
notional) incurred or attributable to a given
thing. (CIMA, London)
Cost is a measurement , in monetary terms ,
of the amount of resources used for the
purpose of production of goods or rendering of
services (ICWA of India)

ELEMENTS OF COST

A cost is composed of three elements:

a) Material
b) Labour
c) Expense

a) MATERIAL COST
According to CIMA, London, material cost is the cost of
commodities supplied to an undertaking
Material cost includes cost of procurement, freight
inwards, taxes, insurance etc directly attributable to the
acquisition.
Material cost be

DIRECT MATERIALS: Direct material cost is that which can be

conveniently identified with and allocated to the cost units.
Direct materials generally become a part of the finished product.
Example: Cotton used in a textile mill.
INDIRECT MATERIALS: These are those materials which cannot
be conveniently identified with individual cost units. These are of
minor importance
-small and relatively inexpensive items which may become a part
of the finished product eg pins, screws, nuts etc.
-- those items which do not physically become a part of the
finished product
Example coal, lubricating oil and grease, soap etc.

LABOUR COST
cost of remuneration (wages, salaries,
commissions, bonuses etc.) of the employees of
an undertaking. It includes all fringe benefits like P.F
contribution, gratuity, ESI, overtime, incentive bonus
etc.

DIRECT LABOUR : Direct labour cost consists of wages

paid to workers directly engaged in converting raw
materials into finished products.
Example: wages paid to labour
INDIRECT LABOUR : It is of general character and
cannot be conveniently identified with a particular cost
unit.
Example: supervisors salary

EXPENSES
Expenses can be defined as the cost of services
provided to an undertaking and the notional cost of the
use of owned assets. (CIMA)

DIRECT EXPENSES: All other costs other than material

and labour costs are expenses. According to CIMA,
London direct expenses are those expenses which can
be identified with and allocated to cost centres or units.
Direct expenses are also known as chargeable
expenses.
Examples: job processing charges
INDIRECT EXPENSES: All indirect costs other than
indirect materials and indirect labour costs are termed
as indirect expenses.
Examples: Depreciation, Advertising, Rent

CLASSIFICATION OF COST

Classification is the process of grouping costs according

their common characteristics.
There are various ways of classifying cost:

I . NATURAL CLASSIFICATION OF COST

II. COST BEHAVIOUR

On the basis of behaviour or variability, costs are classified into:
a) Fixed costs: These are the costs that do not increase or decrease
with the change in the volume of production in the given time
period.
Example: Rent of building, managerial salaries, building insurance
b) Variable costs: These are the costs that vary in direct proportion
to the volume of output.
Example: Direct materials , direct labour
c) Semi-variable or semi-fixed costs: These costs include both a
fixed and variable component i.e these are partly fixed and partly
variable.

Fixed cost

Volume of production

Fixed cost per unit

Rs cost

Rs cost

Total fixed cost

Volume of production

VARIABLE COST

Volume of
production

Variable cost per unit

Rs cost

Rs cost

Total variable cost

Volume of production