Elements of Cost

Financial accounting accumulates various types of costs into broad account. But this is not good for decision making process. In order to make it possible for the decision maker to create proper strategies for the growth of the organization, it is necessary to break down costs into elements.

The detailed classification of cost can be used to describe the elements of cost as follows:

Prime cost

It is the cost which is obtained by adding together all the direct material, direct labor and other direct costs in the manufacturing of the goods.

Prime cost = Direct materials + direct labor + direct expenses

Factory Cost

It is also called Work cost and is obtained by adding factory overheads with prime cost as follows:

Factory cost / work cost = Prime cost + factory overhead (works overhead)

Cost of production

It is obtained by adding factory cost and administration overheads as follows:

Cost of production = factory cost + administration overheads

Cost of Sales

It is also called total cost and is obtained by subtracting selling & distribution overheads from the cost of production as follows:

Cost of sales = cost of production – Selling & distribution overheads.