Elements of Cost - Cost Accounting Record/Book Keeping

 

The elements of cost constitute the cost of manufacture of a product for accounting purpose. In cost accounting, three elements are used to categorize costs. These three elements are Material, Labour and Expenses.

The cost accounting processes are criticized by many management accounting scholars that they are designed primarily to provide information for financial accounting purposes. Management accounting is not given the required focus.

Industrial engineering discipline is not taking steps to make cost accounting provide information to serve their requirements. Industrial engineers departments have to ask for detailed recording of costs for each machine used in the organization. Industrial engineering is concerned with machine effort industrial engineering and human effort industrial engineering. Hence cost incurred for machines have to be treated as element of cost and detailed cost recording has to happen for each machine or at least for all important machines in the organization.

Accounting for materials

For each material that is brought to stores, there is an accounting ledger to which the material received is debited in money terms. When any material is issued to any shop on a material requisition, the value of the material issued is credited to the stores account and it is debited to the shop ledger account or job account/batch account or the process account concerned.

Accounting for Labor

The wages paid to the workmen in each shop are ascertained for the month and from this amount the labor hour rates are determined. This labor hour rate is charged to the jobs/batches or processes which used the labor. To facilitate the calculation of the amount on each job card, the time spent by various operators are recorded.

Accounting for Expenses

Expenses for payments made for services like electricity

The organization may install separate meters for each shop or department and through them know the amount spent by each department.

Material cost, Labor cost and expenses are further classified as direct and indirect costs.

Direct costs can be debited to the job costs directly whenever the expense is incurred. But indirect costs are incurred at the shop level and individual jobs cannot be identified at the time of issue or use. Hence some indirect methods are used to identify the costs incurred at the job level based on the total expense incurred in a month or a period.