Elements of Cost: A Quick Overview

In the business sector and accounting department, cost is the monetary value that a company needs to spend in order to produce something. Cost means the amount of money which a company spends on the creation or production of the goods or services. 

Also, to understand cost, we need to check from a seller’s point of view, cost is that amount of money that is spent to produce a good or a product. While, from a buyer’s point of view the cost of a product is also known as the price of the product. This is the amount that the seller charges for buying the particular product, and it includes both the production cost (borne by the seller) and the mark-up price (for the profit of the seller), which is added by the seller in order to make a profit.

In accounting terminology, the term cost refers to the monetary value of expenditures engaged with the production of goods. In the further section we will know more about the elements of cost.

Example of Costing 

When it comes to recording the costs, it’s done according to the purpose and the reason for the cost. For instance, when there is a record of the cost of purchase inventory it is booked under the account of cost of goods sold when a sale of the goods are made. When you record costs that are necessary for the organization, which includes rent, salary, and more, it is recorded as a selling expense and it is added in the multi-step income statement. 

Types of Cost

Private Costs 

These are the costs incurred that the buyer pays to the seller when the purchase of goods is completed.

External Costs 

This is a cost that is incurred when the buyer is asked to pay as per the result of the transaction. 

Social Costs 

The social costs are a sum of private and the external costs. 

Defensive Cost 

This is an environmental expenditure that is incurred to prevent any environmental damage. 

Labor Costs 

This is the cost that occurs for travel time, training costs, and more. 

Elements of Cost Accounting

In Accounting, a cost is composed of three elements – 

• Material

• Labor 

• Expenses

The above three elements can either be direct and indirect cost.

Thus, to understand the elements of cost we need to learn them vividly.

• Direct Materials:

As there will be only one product and the process of manufacture is simple, the raw material if any is directly charged to the production of the period in total cost.

• Labor:

The labor costs are collected periodically on a regular basis through pay rolls which are prepared separately for each work department.

• Chargeable Expenses:

Expenses other than material and labor are chargeable expenses like excise duty, royalty, expenses on designs, patterns and models.

Overhead – Another Element of Cost

Overhead consists of all the indirect costs. Overhead is also known as the on-cost, supplementary cost, burden cost etc.

Overhead consists of three elements:

1. Indirect materials

2. Indirect labor 

3. Indirect expenses

• Indirect materials – These materials cannot be conveniently identified with the individual cost units. They are generally of minor importance. Examples of indirect materials are - coal, lubricating oil, sand paper, soap, etc.

• Indirect labor –This cannot be identified with a particular cost unit. Indirect labor is not engaged in the production process directly but only this is indirectly and this assists in the production operations. Examples of indirect labor are peon, supervisor, clerk, watchman etc.

• Indirect expenses – All kinds of indirect costs, other than the indirect materials and indirect labor costs, are termed as indirect expenses. This cost cannot be directly identified with a particular job, process or identified with work order and is common to cost units and cost centers. Examples of Indirect expenses - rent and rates, insurance, depreciation, power and lighting, cartage, advertising.

Cost Center in Cost Accounting

A cost center is a department or function within an organization which does not directly add to the profit but still incurs costs the organization money to operate effectively. Cost centers merely contribute to a company's profitability indirectly. Managers of cost centers, like human resources and accounting departments. They are responsible for keeping their cost line low budget. 

Thus, to sum up:

• A cost center is a function within an organization which does not directly add to the profit but still costs money to operate, like working in the accounting, HR, or IT departments. 

• The main use of a cost center is to track the actual expenses for comparison to the budget.

• A cost center indirectly contributes to a company’s profit professing in operational excellence, customer service, with enhanced product value.

• The manager is only responsible for keeping the costs in line with the budget and who does not bear any responsibility regarding the revenue or in investment decisions.

• Whatever operations that take place in cost’s center, they don’t get displayed in the company’s profit. However, services, such as customer service enhance the overall value of the company