Elements of cost | Direct and Indirect: Material, Labor, & Expenses

Educationleaves

17 Mar 202104:24

Summary

TLDRThis video explores the three key elements of cost in manufacturing: material, labor, and expenses. Material cost includes direct (raw materials like milk for butter) and indirect (like cotton waste). Labor cost is divided into direct (workers in production) and indirect (support staff). Expenses cover direct costs tied to specific jobs and indirect costs like rent and utilities. Understanding these costs is crucial for business efficiency.

Takeaways

🔍 The cost of an industrial enterprise is divided into three principal elements: material cost, labor cost, and expenses.
🏭 Material cost includes both direct material cost (raw materials necessary for production) and indirect material cost (materials necessary for the production process but not part of the final product).
🔨 Direct material cost varies with the level of output, such as the amount of milk used to make butter.
⚙️ Indirect materials are used in production but do not become part of the product, like cotton waste or sandpaper.
👷 Labor cost encompasses direct labor cost (cost of labor directly involved in production) and indirect labor cost (cost of labor that supports production operations but is not directly traceable to a specific job).
🛠️ Direct labor cost is associated with workers directly engaged in production, such as assemblers or carpenters.
👮 Indirect labor cost includes remuneration for labor that aids production, like inspectors, watchmen, and storekeepers.
💼 Clerical, managerial, sales, and distribution employees are also considered part of indirect labor costs.
💸 Expenses are costs of services and the theoretical cost of using owned assets, which are not directly linked to labor or material costs.
📊 Direct expenses are those that can be directly identified with a specific job or process, while indirect expenses are common costs incurred for multiple jobs or processes, such as rent or advertising.

Q & A

What are the three principal elements of cost in an industrial enterprise?
-The three principal elements of cost in an industrial enterprise are material cost, labor cost, and expenses.
What is direct material cost and how does it vary?
-Direct material cost is the cost of raw materials necessary to produce or manufacture a product. It varies according to the level of output.
Can you provide an example of direct material?
-An example of direct material is milk, which is used to produce butter.
What is indirect material cost and what are some examples of indirect materials?
-Indirect material cost is the cost associated with materials necessary for the production process but not directly used in the product itself. Examples include cotton waste, sandpaper, oil, greases, etc.
How can the same material be both direct and indirect material?
-The same material can be direct material for one producer and indirect material for another, depending on how it is used in the production process.
What is labor cost and how is it divided?
-Labor cost is the cost of salary, wages, bonus, and commission of the employees of a company. It is divided into direct labor cost and indirect labor cost.
Give an example of direct labor cost.
-Direct labor cost includes the cost of labor directly engaged in production operations, such as workmen assembling parts or carpenters making furniture.
What is indirect labor cost and who does it include?
-Indirect labor cost includes the remuneration paid for labor engaged to help production operations but not directly traced to a job process or production order. It includes inspectors, watchmen, sweepers, storekeepers, and other staff whose labor costs are not directly attributed to specific jobs or processes.
What are expenses and how are they categorized?
-Expenses are the cost of services provided to an undertaking and the theoretical cost of the use of owned assets. They are categorized into direct expenses and indirect expenses.
What is a direct expense and provide an example?
-A direct expense is an expense that can be directly identified with a unit of output, job process, or operation. An example is the cost of special patterns, designs, or plans for a particular job or work order.
Can you explain indirect expenses with an example?
-Indirect expenses are expenses other than indirect material and indirect labor that cannot be directly identified with units of output, job process, or operation. They are incurred commonly for jobs and processes, such as rent, power, lighting, depreciation, bank charges, advertising, etc.

Outlines

00:00

📚 Elements of Cost in Manufacturing

In this educational video, the speaker discusses the fundamental elements of cost involved in the manufacturing process. The video begins by defining the cost of manufacturing a product and categorizes it into three main components: material cost, labor cost, and expenses. Material cost is further divided into direct material cost, which includes raw materials necessary for production, and indirect material cost, which covers materials used in the production process but not as part of the final product. Labor cost is broken down into direct labor cost, referring to the wages of workers directly involved in production, and indirect labor cost, which includes the remuneration for support staff not directly tied to a specific production process. Lastly, expenses are defined as the costs of services and the theoretical cost of using owned assets, with direct expenses being those directly linked to a specific job or process, and indirect expenses being general costs incurred for multiple jobs or processes. The video encourages viewers to access more detailed information through a provided link and supports the channel through subscriptions and likes.

Mindmap

Keywords

💡Cost Elements

Cost elements refer to the fundamental components that make up the total cost of manufacturing a product or running an industrial enterprise. In the video, these are broken down into three principal elements: material cost, labor cost, and expenses. Understanding these elements is crucial for managing and controlling the cost of production, which is a central theme of the video.

💡Material Cost

Material cost is the expense associated with the raw materials used in the production process. It is divided into direct and indirect material costs. Direct material cost pertains to the primary raw materials necessary for the product, such as milk for butter. Indirect material cost involves materials used in the production process but not forming part of the final product, like cotton waste or sandpaper. This concept is central to the video as it illustrates the different types of costs involved in production.

💡Direct Material Cost

Direct material cost is the cost of raw materials that are directly used to manufacture a product. It varies with the level of output and is a significant part of the total cost of production. For instance, in the script, milk is mentioned as a direct material for butter, emphasizing the direct correlation between the quantity of raw materials used and the cost incurred.

💡Indirect Material Cost

Indirect material cost refers to the cost of materials that support the production process but are not incorporated into the final product. Examples given in the video include cotton waste, sandpaper, and oil greases. These materials are essential for the production process but are not directly traceable to the finished product, making their costs indirect.

💡Labor Cost

Labor cost is the expense related to the wages, salaries, bonuses, and commissions paid to the employees of a company. It is a critical component of the total cost of production and is divided into direct and indirect labor costs. The video explains that direct labor cost is associated with workers directly involved in the production process, while indirect labor cost includes remuneration for support staff like inspectors and storekeepers.

💡Direct Labor Cost

Direct labor cost is the payment made to workers who are directly engaged in the manufacturing process. These are the employees whose work directly contributes to the creation of the product, such as assembly line workers or carpenters making furniture. The video uses these examples to highlight how direct labor costs are a significant and calculable part of the overall production cost.

💡Indirect Labor Cost

Indirect labor cost covers the remuneration paid to employees whose work supports the production process but is not directly tied to the manufacturing of a specific product. This includes labor costs for inspectors, watchmen, and sweepers, whose roles are essential but not directly linked to a particular product or production order. The video emphasizes that these costs are harder to trace and are considered indirect.

💡Expenses

Expenses in the context of the video refer to the costs of services provided to an undertaking and the theoretical cost of using owned assets. These are costs other than labor and materials, such as rent, power, lighting, and advertising. The video explains that expenses are categorized into direct and indirect, with direct expenses being specifically associated with a job or process, while indirect expenses are common costs incurred for multiple jobs or processes.

💡Direct Expenses

Direct expenses are those that can be directly linked to a specific unit of output, job, or process. They are incurred for a particular purpose and are not shared with other jobs or processes. An example given in the video is the cost of special patterns or designs for a specific job order, illustrating how these costs are directly traceable and identifiable with the output they produce.

💡Indirect Expenses

Indirect expenses are costs that cannot be directly associated with a specific unit of output or production process. These are general costs incurred for the overall operation of the business, such as rent, utilities, and depreciation. The video mentions that these expenses are essential for the business but are not directly linked to the production of a single product, making them indirect.

Highlights

The cost of an industrial enterprise can be divided into three principal elements: material cost, labor cost, and expenses.

Material cost includes direct material cost and indirect material cost.

Direct material cost represents the raw material necessary to produce a product.

Indirect material cost is for materials necessary for the production process but not part of the product.

Labor cost consists of direct labor cost and indirect labor cost.

Direct labor cost is the cost of labor directly engaged in production operations.

Indirect labor cost includes remuneration for labor that supports production but is not directly traced to a job or process.

Expenses are the costs of services provided to an undertaking and the theoretical cost of using owned assets.

Direct expenses are those that can be directly identified with a unit of output or job process.

Indirect expenses are costs that cannot be directly identified with units of output or job processes and are common to jobs and processes.

The cost of idle time, overtime, holidays, etc., is considered an indirect cost.

Clerical and managerial staff, salesmen, and distribution employees are included in indirect labor.

Examples of indirect materials include cotton waste, sandpaper, oil, greases, etc.

The same material can be direct for one producer and indirect for another.

Some direct materials used so little are charged as indirect materials or overheads, such as nails, glue, and paints.

Indirect expenses include rent, power, lighting, depreciation, bank charges, and advertising.

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