WHAT IS COST & WHAT ARE ITS COMPONENTS

In general, cost means the amount of expenditure incurred on a product or service attributable to it. To take an example, if furniture manufacturer makes a chair by spending Rs.1200/- for timber, Rs.100/- for wages to the carpenter and Rs.300/- as rent and other expenses, then we can say that the chair costs him Rs.1600/-

Meaning of Cost Classification :

Cost classification is the process of grouping costs according to their common characteristics. Costs can be classified according to:

a) Elements
b) Functions
c) Behaviour

Classification of cost by elements:
Costs are classified primarily according to the elements or factors upon which expenditure is incurred. These elements are:
a) Materials cost : It is the cost of commodities supplied to an undertaking.
b) Labour cost or wages: It is the cost of remuneration of the employees of an undertaking which includes wages, salaries, commission, bonus, etc.
c) Expenses: It is the cost of services provided to an undertaking.
The above elements of cost can be further sub-divided as :
1. Direct Expenditure in
a) Materials, b) Labour, c) Experses
2. Indirect Expenditure in

a) Materials, b) Labour, c)Expenses.
Direct Expenditure means the expenditure which can be identified with and allocated to cost centres or cost units. On the other hand, the term “Indirect Expenditure” means that expenditure which cannot be allocated to or absorbed by cost centres or cost units. Thus the different elements of cost are:
a) Direct materials, b) Indirect materials, c) Direct labour, d) Indirect labour, e) Direct expenses and f) Indirect Expenses.
Each of the above elements of cost is discussed in brief as below :
a) Direct Materials :These are the materials which can be conveniently identified with a product or cost centre. These are the basic materials which enter into and form part of the product.
Examples : Clay in brick laying, wood in furniture making, leather in shoe manufacturing etc.
Direct materials also include the following :-
i) All materials specially purchased or requisitioned for a particular process, job or production order,
ii) All components used,
iii) All materials passing from one process or operation to the other,
iv) All primary packing materials like card board boxes, wrappings, cartoons etc.
b) Indirect Materials : These are the materials which cannot be traced as a part of the finished product. Indirect materials are also known as on cost materials or Expense materials.
Example : i) Fuel, lubricating oil etc. required for operating and maintaining plant and machinery;
ii) Small tools for general use;
iii) Materials consumed for repair and maintenance work;
iv) Sundry stores of small value used in the factory like thread in shirt making, nails in shoe-making etc.
c) Direct wages : It is the cost of wages paid to workers engaged directly in altering the construction, composition, conformation or condition of the product manufactured by a concern. It is that part of wages which is paid to workers who help in converting raw-materials into finished products. When a concern does not manufacture, but in stead renders a service, then the wages paid to those who directly carry out the service will be treated as direct wages. For example, in case of Transport services, wages paid to driver, conductor etc. will be treated as direct wages. Direct wages are also called direct labour, productive labour, process labour, operating labour, prime cost labour etc.
Sometimes, some indirect wages may be treated as direct wages. For example, a supervisor’s wages specifically incurred for a particular job only, shall be treated as direct wages.
d) Indirect wages : Wages which cannot be directly identified with a job, process or operation, are generally treated as indirect wages. It represents the cost of labour employed in the works ancillary to production.
Examples : i) Wages of Inspectors, supervisors,
ii) Wages of maintenance workers such as work shop cleaners, mechanics etc.
iii) Wages of internal transport men;
iv) Idle time wages, overtime premium, night shift and holiday work bonus;
v) Miscellaneous allowances to labour;
vi) Wages payable to store keeper, works clerical staff, watch and ward etc.
e) Direct Expenses : These are the expenses other than direct materials and direct labour, but are directly identifiable with a job, process or operation. Direct expenses are otherwise known as chargeable expenses or prime cost expenses or productive expenses.
Examples : i) Hire charge of a special concrete mixer required for civil engineering job;
ii) Cost of special pattern, drawing or lay out;
iii) Royalty payable on production;
iv) Cost of rectifying defective goods;
v) Maintenance costs of Special tools required for the execution of a job or contract.
f) Indirect Expenses : Expenses which cannot be charged to production directly and which are neither indirect materials cost nor indirect labour cost are regarded as indirect expenses.
Examples : i) Rent, rates and taxes;
ii) Insurance;
iii) Canteen expenses;
iv) Hospital and dispensary expenses;
v) Depreciation, repairs, maintenance etc. on plant and machinery;
vi) Power, lighting and heating etc.