In management accounting total cost of product is divided
into two parts
·
Manufacturing or production
costs.
·
Non-manufacturing or period
costs.
Manufacturing cost is then divided into elements of cost
which includes:
1.
Material cost.
2.
Labour cost.
3.
Expenses.
Material Cost:
Material cost is a cost of material used to produce goods. It
is them divided into two categories:
·
Direct Material Cost
·
Indirect Material Cost
Direct Material Cost: It is a material cost that is directly
attributable to product or that is used as a direct raw material to produce
goods e.g. Timber used to produce furniture, Glass used to produce Bulb etc.
Indirect Material Cost: It is a material cost that is not
directly attributable to product or cost of material that is not directly used
to produce final product e.g. tapes, glues, hammer, nails etc.
Labour Cost:
Labour cost is a cost of wage and salaries paid to produce
product. It is also divided into two categories:
·
Direct Labour Cost
·
Indirect Labour Cost
Direct Labour Cost: It is a labour wage paid to those labour
who directly contributed in converting raw material into final product.
Indirect Labour Cost: It is cost of wages or salaries paid
to employees those are not providing their services that are directly related
to produce product e.g. Administration, Marketing Department Salaries.
Expenses:
These are the costs other than material and Labour costs. These
are also divided into two categories:
·
Direct Expenses
·
Indirect Expenses
Direct Expenses: It refers to the costs that directly
related to final product or varies directly with numbers of units produced e.g.
Electricity expense of machine that produce goods.
Indirect Expenses: It refers to the cost that is not directly
varies with production of product e.g. Electricity cost of non-production
departments.
Overheads:
All the indirect cost are falls into overhead Cost.
Overhead= Indirect material cost + Indirect Labour Cost +
Indirect Expenses.
Overhead have following Categories:
1.
Production Overhead:
Expenses incurred on factory floor, includes indirect material and labour costs.
2.
Administration Overhead:
Expenses in connection with administration of company or factory.
3.
Selling and Distribution
Overhead: Expenses incurred to sell and distribute final product.