Page 105 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 5.3 Elements of Cost

To find the total cost of the product or service, the costs incurred are grouped under various
categories.

Figure 5.5

Cost

Material Labour Expenses

Direct Direct . Direct

Indirect Indirect Indirect

O V E R H E A D S

Production Administrative Selling Overheads Distribution
Overheads Overheads Overheads

The elements of cost are as follows:
1. Material
Material includes the following:

(a) Direct material: To obtain the materials that will be converted into the finished product,
the manufacturer purchases raw materials. Raw materials are the basic materials
and parts used in the manufacturing process. For example, car manufacturers such as
Maruti Udyog and Tata Motors use steel, plastics, and glass as raw materials in
making cars. Raw materials that can be physically and directly associated with the
finished product during the manufacturing process are called direct materials.
Examples include flour in the making of bread, steel in the making of cars etc. Direct
materials for HP in making computers include plastic, hard drives, processing chips
etc.
Direct material is
Opening stock + Purchases – Closing stock
(b) Indirect material: Some raw materials cannot be easily associated with the finished
product. These are considered indirect materials. Indirect materials
(i) do not physically become part of the finished product, such as lubricants and
polishing compounds, or
(ii) cannot be traced because their physical association with the finished
product is too small in terms of cost, such as nails and Fevicol (as per the
previous example). Indirect materials are treated as part of manufacturing
overhead.

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