Cost Classification

• Cost Classification by Elements
• Cost Classification By Nature

ELEMENTS OF COST

• Material Cost
  
• Labour Cost
  
• Expenses Cost

Material Cost

The cost of commodities, other than fixed assets, introduced into products or consumed in the operation of an organisation

Wages Cost

The cost of employees remuneration.

Expenses Cost

All costs other than materials and wages

Classification By Nature

Direct Cost
These are materials, labour and expenses cost that are incurred for the purpose of a particular cost unit

Indirect Cost
These are material, labour and expenses cost which are incurred for more than one cost unit and which must therefore be shared among these cost units

DIRECT AND INDIRECT COST

Direct Cost

• Direct material
  
• Direct Labour
  
• Direct expense

= PRIME

Indirect cost

• Indirect materials
  
• Indirect Labour
  
• Indirect expenses

=OVERHEADS

DIRECT MATERIAL COST

• Eg. Materials specifically purchased for a particular job
  
• Primary packing materials eg. Boxes, wrappings
  
• Materials passing from one stage to another

PRIME COST

The sum of direct costs is known as prime cost Thus Prime cost = Direct material + Direct Labour + Direct Expenses

INDIRECT MATERIALS

• Material costs which cannot be traced as part of the product.
  
• It usually includes materials required for operating and maintaining the plant and machinery eg: Lubricating oil

INDIRECT LABOUR

These are the wages which cannot be allocated but which can be apportioned to or absorbed by a cost centre or cost unit Eg: salaries of inspectors / Salaries of cleaners

INDIRECT EXPENSES

These are the expenses which cannot be allocated but which can be apportioned to or absorbed by a cost centre or cost unit. Eg: insurance, Rent