Elements of cost- Prime and Overheard Cost

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Elements of cost:

There are three elements of cost: 1. Material cost 2. Labor cost and 3. Expenses

Material Cost: cost of raw materials, spare parts, consumable materials, packaging materials

Labor Cost: cost of skilled and unskilled labor employed in construction or production processes

Expenses: cost of special design, drawings or layouts, cost of purchase or hiring of tools and equipement for particular job and maintenance cost of such tools, advertisements

 

Prime and Overheard Cost:

Prime Cost: The direct cost that can be reasonably measured and allocated to an specific output or work activities. This is the aggregate of direct material cost.

Prime cost = direct material cost + direct labor cost + direct expenses

Components of Prime cost

  1. Direct Material cost
    • Materials including component parts, raw materials, specially purchased material for a specified job, order or processes
    • Materials passing from one operation or process to another
    • Primary packing materials such as cartoons, cardboard boxes
  2. Direct Labor Cost
    • Laborer engaged in altering the condition, confirmation and composition of the product
    • Inspector, analyst, designer, expert specially required for production
    • If specially identified, the wage of foreman, shop clerks, the wages of internal transport personnel
  3. Direct Expenses
    • Cost of special designs, drawings or layouts
    • Hire of special tools and equipment for a particular job
    • Maintenance cost of these special tools and equipments

Overhead Cost:

The indirect cost that can’t be reasonably measured and allocated to specific output or work activities is referred as overhead cost. This is the sum of indirect material cost, indirect labor cost and indirect expenses. Includes value increment, new office installation and premium insurance.

Overhead cost = indirect material cost + indirect labor cost + indirect expenses

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