320EL28a - MODULE 6B Basic Cost Concepts Elementary Cost...

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ACCOUNTANCY MODULE - 6B Notes Elementary Cost Accounting 106 In the previous lesson you have learnt about cost accounting. If you decide to manufacture say electronic digital meter, you will need raw material, labour and incur other incidental expenses to manufacture. These constitute the cost of manufacturing. You will incur expenses till your products are sold. You need to learn the concept of cost, its elements and types etc. so that you can better learn the accounting of costs. In this lesson you will learn about the basic cost concepts. OBJECTIVES After studying this lesson, you will be able to: state the meaning of cost; explain the elements of cost; state the meaning of overheads; explain the classification of cost. 28.1 COST : MEANING AND ITS ELEMENTS The term ‘cost’ means the amount of expenses [actual or notional] incurred on or attributable to specified thing or activity. As per Institute of cost and work accounts (ICWA) India, Cost is ‘measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services. To get the results we make efforts. Efforts constitute cost of getting the results. It can be expressed in terms of money; it means the amount of expenses incurred on or attributable to some specific thing or activity. The 28 BASIC COST CONCEPTS
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MODULE - 6B Elementary Cost Accounting Notes 107 Basic Cost Concepts ACCOUNTANCY term cost is used in this very form. In reference to production/manufacturing of goods and services cost refers to sum total of the value of resources used like raw material and labour and expenses incurred in producing or manufacturing of given quantity. Elements of cost Cost of production/manufacturing consists of various expenses incurred on production/manufacturing of goods or services. These are the elements of cost which can be divided into three groups : Material, Labour and Expenses. Elements of cost Material Labour Expenses Material To produce or manufacture material is required. For example to manufacture shirts cloth is required and to produce flour wheat is required. All material which becomes an integral part of finished product and which can be conveniently assigned to specific physical unit is termed as “Direct Material”. It is also described as raw material, process material, prime material, production material, stores material, etc. The substance from which the product is made is known as material. It may be in a raw or manufactured state. Material is classified into two categories: Direct Material Indirect Material Direct material Direct Material is that material which can be easily identified and related with specific product, job, and process. Timber is a raw material for making furniture, cloth for making garments, sugarcane for making sugar, and Gold/ silver for making jewellery, etc are some examples of direct material.
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  • Spring '14
  • Guymon
  • Institute of Cost, Basic Cost Concepts

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