WHAT IS COST ?

Cost denotes the amount of money that a company spends on the

creation or production of goods or services. It does not include the
markup for profit.
TYPES OF COSTS

 Direct Cost

 Indirect Cost
DIRECT COST
 The cost can easily be traced to a product, department, or
project

 Direct costs are related to producing a good or service.

 A direct cost includes raw materials, labor, and expense or

distribution costs associated with producing a product..

 For example, Ford Motor Company manufactures cars and

trucks. A plant worker spends eight hours building a car. The
direct costs associated with the car are the wages paid to the
worker and the cost of the parts used to build the car.
TYPES OF DIRECT COST

 Direct Material
 Direct Labor
 Direct Expenses
DIRECT MATERIAL
 Direct materials are those which can be specifically traced to a unit of
production.

 For Example,
 Tracing wood into furniture
 Timber used to construct a house.
 Steel included in an automobile.
 Circuit board included in a radio.
 Fabric used to assemble clothing.
 Plastic used to make Toys.

 Direct materials will be subject to formal requisition requests

DIRECT LABOUR
 Direct labour means labour directly involved in making units.

 Direct labour is labour that can be directly identified with a unit of

production.

 For Example,
 Assembly line workers,
 Production supervisors,
 Quality control inspectors.

 Labour time can be recorded using clock cards, time sheets, or by an

assumption that everyone works a standard day
DIRECT EXPENSES

 It is rare for expenses to be directly traceable to the product

 For Example,
 Royalties
PRIME COST

Direct Material x
Direct labour x
Direct expenses x
Prime cost x
INDIRECT COST
 The cost cannot easily be traced to a product, department, or
project

 Indirect costs are related to producing a good or service.

 An indirect includes raw materials, labor, and expense

associated with producing a product..

 For example, with Ford, the direct costs associated with each
vehicle include tires and steel. However, the electricity used to
power the plant is considered an indirect cost because the
electricity is used for all the products made in the plant. No
one product can be traced back to the electric bill.
TYPES OF INDIRECT COST

 Indirect Material
 Indirect Labor
 Indirect Expenses
INDIRECT MATERIAL
 Indirect materials are those which cannot be specifically traced to a
unit of production.

 For Example,
 Oil and lubricants for machinery.
 Cleaning supplies.
 Disposable safety equipment.
 Disposable tools.
 Fittings and fasteners.
 Glue.
 Tape used in Packaging
INDIRECT LABOUR
 Indirect labour means labour who are not directly involved in making
units.

 Indirect labour is labour that cannot be directly identified with a unit

of production.

 For Example,
 Maintenance workers
 Factory Manager
 supervisors,
 Security guards in the factory,
 Quality assurance workers in the factory
INDIRECT EXPENSES

 expenses which are not to be directly traceable to the

product.

 For Example,
 Heating and Lighting for factory
PRODUCTION OVERHEADS

Indirect Material x
Indirect labour x
Indirect expenses x
Production Overheads x
PRODUCTION OVERHEADS
Direct Material x
Direct labour x
Direct expenses x
Prime cost x
Indirect Material x
Indirect labour x
Indirect expenses x
Production Overheads x
Production Cost x
NON PRODUCTION OVERHEADS
Businesses also have non-production overheads. These are costs which
have nothing to do with production such as
 The accounting department,
 advertising,
 distribution,
 head office costs.
TOTAL COST
 Prime cost = direct material + direct labour + direct expenses
 Factory cost = prime cost + production overheads
 Total cost = factory cost + non-production overheads
EXAMPLE
 Which item would most likely be treated as an indirect cost by a
furniture manufacturer?

 A Fabric to cover the seat of the chair

 B Metal used for the legs of the chair

 C Staples to fit the fabric to the seat of the chair.

 D Wood used to make the frame of the chair

EXAMPLE
 Canine Co makes shoes. It buys in leather, thread and metal clips to
make them, employs people to operate stitching machines and
assemble the finished leads and has various running costs
(overheads) for the rented factory space it uses.

Which of the following costs would be classified as indirect labour?

A Leather

B Factory rent

C Wages for machine operator

D Wages for factory manager