It is not enough for a firm to divide the costs into fixed and variable costs. It has to work out in detail the different expenses incurred on various heads.
Prime cost
Prime cost refers to all such expenses which can be directly assigned to the production of a commodity. It generally varies directly or proportionataly with the size of production. It consists of direct material cost, direct labour cost and other direct expenses. Direct materials comprise those materials which are easily identified with the product. Thus if a firm is producing biscuits, wheat, sugar, etc. will be considered direct materials.
Direct labour refers to that labour which can be easily associated or identified with a particular job or product or process leading to production of final good. Wages paid to such labour are called direct wages. Direct labour includes not only labour directly associated with production of a product but also labour engaged in maintenance, supervision, inspection etc.
Direct expenses include all other expenses which are directly related with the production process.
Production overheads
These refer to all such expenses which cannot be directly assigned to a particular unit of commodity or a particular process. However, these expenses can be charged to a unit of commodity produced by spreading them over all the units. These expenses include indirect materials, indirect wages and other indirect expenses. Indirect materials include, materials used for the maintenance of machinery, plant etc., and materials which are not expensive enough to be considered as direct material.
Indirect wages include wages to maintenance workers, supervisors, trainees and instructors, security and other staff etc. Indirect expenses include expenses which cannot be directly allocated to a product or cost unit but which can be apportioned by various cost units.
Production cost
It is the sum total of prime cost and production overheads.
Costs related to other functions
All those expenses which are incurred in connection with the general organisation as a whole or as cost of operating supplies and services used by the enterprise come under this head. These include administrative overheads (such as rent, light, salaries of staff, etc.) selling overheads (such as salesmen’s salaries, showroom’s rent, travelling expenses of salesmen, free gifts to customers, exhibition etc.) and distribution overheads (such as warehouse rent, salaries of warehouse staff, insurance of godowns etc).
Total cost
If refers to the sum of production cost and costs related to other departments.
Shopping Cart
