COST SHEET

Components of Cost
1. Direct Materials are those materials which can be identified in the product and can be
conveniently measured and directly charged to the product. Thus, these materials directly
enter the production and form a part of the finished product. For example, timber in furniture
making, cloth in dress making, bricks in building a house. Following are normally classified
as direct materials:
i. All raw materials like jute in the manufacture of gunny bags, pig iron in foundry, and
fruits in canning industry-
ii. Materials specifically purchased for a specific job, process or order like glue for
book-binding, starch powder for dressing yarn.
iii. Parts or components purchased or produced like batteries for transistor-radios and
tyres for cycles.
iv. Primary packing materials like cartons, wrappings, cardboard boxes, etc. used to
protect finished product from climatic conditions or for easy handling inside the factory.
From the above discussion it becomes clear that indirect materials are those materials which
cannot be classified as direct materials. Examples of indirect materials are: consumables, like
cotton waste, lubricants, brooms, rags, cleaning materials, materials for repairs and
maintenance of fixed assets, high speed diesel used in power generators etc.
Classification of materials into direct and indirect facilitates material control. Direct materials
are usually high value items as compared to indirect materials and need strict control and
critical analysis for reducing their cost. On the other hand, simple control techniques are
sufficient in case of indirect materials being low value items.
However, in some cases, though the material is a part of the finished product yet it is not
treated as direct material; for example, sewing thread in dress making and nails in furniture
making. This is because they are used in comparatively small quantities and it would be futile
elaboration to make an analysis of them for the purpose of direct charge. Such materials are
treated as indirect materials. Thus, it can be concluded that the ease and the feasibility with
which a material can he traced into the composition of a finished product will determine what
is to be treated as direct material.
2. Direct Labour is all labour expended in altering the construction, composition,
confirmation or condition of the product. In simple words, it is that labour which can be
conveniently identified or attributed wholly to a particular job, product or process or expended
in converting raw materials into finished goods. Wages of such labour are known as direct
wages. Thus, it includes payment made to the following groups of labor;
i. Labour engaged on the actual production of the product or carrying out of an operation
or process.
ii. Labour engaged in aiding the manufacture by way of supervision, maintenance, tools
setting, transportation of material etc.
iii. Inspectors, analysts etc. specially required for such production.
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The wages paid to supervisors, inspectors, etc., though not direct labour, can be treated as
direct
labour if they are directly engaged on specific product or process and the hours they spend on
it can be directly measured without much of an effort. Similarly where the cost is not
significant like the wages of trainees or apprentices, their labour though directly spent on a
product is not treated as direct labour.
3. Direct Expenses (or Chargeable) Expenses. All expenses which can be identified
to a particular cost centre and hence directly charged to the centre are known as direct
expenses. In other words all expenses (other than direct materials and direct labour) incurred
specifically for a particular product, job, department etc. are called direct expenses. These are
directly charged to the product. Examples of such expenses are royalty, excise duty, hire
charges of a specific plant and equipment, cost of any experimental work carried out
especially for a particular job, travelling expenses incurred in connection with a particular
contract or job etc.
4. Overheads may be defined as the aggregate of the cost of indirect materials, indirect
labour and such other expenses including services as cannot conveniently be charged direct to
specific cost units. Thus overheads are all expenses other than direct expenses. In general
terms, overheads comprise all expenses incurred for or in connection with the general
organisation of the whole or part of the undertaking i.e., the cost of operating supplies and
services used by the undertaking and including the maintenance of capital assets. The main
groups into which overheads may be sub-divided are:
(a) Manufacturing or Production or Works Overhead. It is the indirect expense of operating
the manufacturing divisions of a concern and covers all indirect expenditure incurred by the
undertaking from the receipt of the order until its completion ready for despatch either to the
customer or to the finished goods store. Examples of such expenses arc : depreciation and
insurance charges on fixed as- sets like plant and machinery, works, building, and electric
equipment and floating assets like stores, finished goods etc.; repairs and maintenance of
fixed assets ; electricity charges ; coal and other fuel charges; rent, rates and taxes on works,
land and properties, works office printing, stationery, postage, telegrams and telephone
charges ; welfare services like canteen and recreation clubs ; medical services like dispensary
and hospital and service department expenses. It also includes wages of indirect workers,
indirect materials such as lubricants, cotton wastes and other factory supplies, salaries and
other costs related to tool room, design and drawing office, production control and progress
department.
(b) Administration overhead. It is the indirect expenditure incurred in formulating the policy,
directing the organisation, controlling and managing the operations of an undertaking which
is not related directly to a research, development, production or selling activity or function. It
consists of all expenses incurred in the direction, control and administration (including
secretarial, accounting and financial control) of an undertaking. Examples are the expenses in
running the general office e.g. office rent, light, heat, salaries and wages of clerks, secretaries
and accountants, credit approval, cash collection and treasurer's department, general

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managers, directors, executives ; legal and accounting machine services ; investigations and
experiments and miscellaneous fixed charges.
(c) Selling overhead. It is the cost of seeking to create and stimulate demand and of securing
orders and comprises the cost of soliciting and recurring orders for the articles or commodities
dealt in and of efforts to find and retain customers. It refers to those indirect costs which are
associated with marketing and selling (excluding distribution) activities. Examples are sales
office expenses ; salesmen's salaries and commission ; showroom expenses ; advertisement
charges ; fancy packing to attract sales ; samples and free gifts ; after sales service expenses;
demonstration and technical advice to potential customers: cost of marketing information
system and costs of catalogues and price lists.
(d) Distribution overhead. It is the expenditure incurred in the process which begins with
making the packed product available for dispatch and ends with making the reconditioned
return empty package, if any available for reuse. It comprises all expenditure incurred from
the time the product is completed in the works until it reaches its destination. Under these
would be included warehouse rent; warehouse staff salaries, insurance etc.; expenses on
delivery van and trucks; expenses on special packing for bulk transport like bales, crates,
chests etc. ; losses in warehouse stocks and finished goods damaged in transit and cost of
repairing and reconditioning of empties and wastage of finished goods.
(e) Research and development expenses. Research cost is the cost of searching for new and
improved products, new applications of materials or products, and new applications and
improved methods. Development cost is the cost of the process which begins with the
implementation of the decision to produce a new or improved method and ends with the
commencement of formal production of that product or by that method.
Overheads can also be classified as indirect materials, indirect labour and indirect
expenses
1. Indirect Materials. Such materials refer to those materials which do not normally form a
part of the finished product. It has been defined as "materials which cannot be allocated but
which can be apportioned to or absorbed by cost centres or cost units." These are:
(a) Stores used in maintenance of machinery, building etc. like lubricants, cotton waste,
bricks and cements ;
(b) Stores used by the service departments i.e. non-productive departments like power
house, boiler house and canteen etc.; and
(c) Materials which due to their cost being small, are not considered worthwhile to be
treated as direct materials.
Examples of indirect materials are stores consumed for repair and maintenance work,
sundry stores of small value expended for factory use, small tools for general use,
lubricating oil, losses, deficiencies and deterioration of stores etc.
2. Indirect Labour. The wages of that labour which cannot be allocated but which can be
apportioned to or absorbed by cost centres or cost units is known as indirect labour. In other
words wages paid to labour which is employed other than on production constitute indirect
labour costs. Examples of such labour are : charge-hands and supervisors ; maintenance
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worker; departmental coolies ; men employed in service departments, material handling and
internal transport ; apprentices, trainees and instructors; works clerical staff and labour
employed in time office and security office, holiday pay, leave pay, employer's contribution to
funds, miscellaneous allowances to labour.
3. Indirect Expenses are expenses which cannot be allocated but which can be apportioned
to or absorbed by cost centres or cost units as rent, rates, insurance, municipal taxes, general
manager's salary, canteen and welfare expenses, power and fuel, cost of training new
employees, lighting and heating, telephone expenses. So, under indirect expenses two types of
expenses are included :
(a) Such type of expenditure in respect of which payments are made for services rendered or
supplies made. Amount in respect of such expenditure will be found from the voucher
registers on the dates, on which they are incurred,
(b) Such items which do not involve any payments and are mere adjustment transactions e.g.,
depreciation.
Expenses Excluded from Costs
The total cost of a product should include only those items of expenses which are a charge
against profit. Items of expenses which are relating to capital assets, capital losses, payments
by way of distribution of profits and matters of pure finance should not form a part of the
costs. Examples of such expenses are - income-tax, dividends, abnormal wastage of material,
wages paid for abnormal idle time, interest on capital given or received, expenses of raising
capital, discount on shares and debentures, profit or loss from the sale of asset or investments,
excessive depreciation, appropriation of profits, writing off goodwill, preliminary expenses
and underwriting commission ; cash discount, debentures interest, incomes which are not
connected with business i.e., transfer fees, rent, interest, dividend received and capital
expenditure.

Cost Accounting – S P Jain & K L Narang