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The cost of an article is the amount of expenditure which has been incurred in the article. The Three Principal elements are:

(i) Materials

(ii) Labours

(iii) Expenses

Each of these elements is divisible into direct (prime cost) and indirect expenditure (factory overhead).

1. Prime Cost:

These are expenditures which can be charged directly to a particular unit. The prime cost can easily be identified with a particular unit of output e.g Direct labour, direct expenses, and direct materials.

(a) Direct Materials: This is the expenditure incurred on raw materials which can be traced directly to a particular production unit of output e.g. Tobacco in cigarettes, flour for bread. They are physical things which will actually form part of the finished products.

(b) Direct Labour: These refer to the cost of labour services which are easily and directly traceable to the creation of a product e.g wages of machine operators, assembly-line workers wages.

(c) Direct Expenses: These are those costs that do not relate to direct material or labour but are incurred specifically on a particular product and on every unit produced. e.g. Royalty, excise duty, Franchise, etc.

2. Factory Overhead:

These are costs necessary for production which are not directly traceable to a specific quantity of physical units. Factory overheads are not identifiable with units of production e.g. factory rent and rates. Depreciation of plant and machinery, indirect wages factory fuel, upkeep of factory building.

3. Non-Manufacturing Cost:

These are period cost which is treated as expenses and deducted from the revenue of the period in which they are incurred. They are not part of the production cost. These include:

(i) Setting expenses: This includes Salaries and Commission of Salesman, advertising, sales office stationery, etc.

(ii) Distribution expenses: This covers the cost of warehousing, transport, material handling, and control of finished goods from the moment they are delivered to the customer e.g. carriage outwards, packing materials, the lighting of a warehouse.  

(iii) Administrative Expenses: This comprises of cost of accounting and secretarial work. It includes office rent, rates, lighting, Insurance, Salaries, etc.


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