Elements of cost

Elements of cost are considered to arrive at a total project cost estimate. The elements of cost are generic in nature.  They are not considered as definitive examples since the accounting practices of different firms and organizations may vary greatly. The definition of the cost parameters is usually not the responsibility of one department of the organization. The main aim is to give an idea of the various components that are included in the total project cost.

The elements of cost include direct materials, direct labor and expenses. Direct materials are material which can be conveniently identified with or allocated to cost centers and cost units. It refers to the material from which a product is manufactured. These materials enter into and form a part of the product. For example timber used in the manufacturing of furniture is a direct material. Direct material is a component of prime cost. Direct material directly varies with the output.

Direct labor costs are costs which can be conveniently identified with or allocated to cost centers and cost units. These costs include the wages paid to the workers who actually produce goods. In case the work is done manually, it is not difficult to locate direct worker because he is the one who produces goods. Examples include wages and salaries paid to the workers.

Direct expenses are the cost of services provided to an undertaking and the notional cost of the use to the owned assets. These expenses can be easily identified with or allocated to cost centers or cost units. For example the charge for hiring a special plant for production is also direct expense and it can be easily identified with and allocated to cost centers or cost units. Another example of direct expense would be the cost of preparing blue print for a production.

Questions

• Define elements of cost?
• What are the components of elements of cost? Explain with an example.