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Cost Accounting

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Components of Total Cost

Prime cost

It consists of costs of direct material, direct labour and direct expenses. It is also known as basic, first or flat cost.

Factory cost

It comprises of prime cost and, in addition, overheads which includes cost of indirect material, indirect labour, and indirect expenses of the factory. The cost is also known as work costs, production or manufacturing cost.

Office cost

If office and administrative overheads are added to factory cost, office cost is arrived at this is also termed as administrative cost or the total cost of production.

Total cost

Selling and distribution overheads are added to the total cost of production to get the total cost or the cost of sales.

The various components of total cost can be depicted through the help of the following chart:

Components of total cost

Direct material plus                          Prime cost or direct cost or first cost
Direct labour plus
Direct expenses

Prime cost plus                      Works cost or factory cost or production cost or manufacturing cost
Works overheads

Office cost plus selling
and distribution overheads              Cost of sales or total cost

Adjustment for inventories

The following adjustments may have to be made for inventories of raw materials, work-in-progress and finished goods while computing the different components of cost:

(i) Direct material consumed = opening stock of direct material + purchases of direct material – closing stock of direct material

(ii) Works cost = gross works cost + opening work-in-progress – closing work-in-progress

(iii) Cost of production of goods sold = cost of production + opening stock of finished goods – closing stock of finished goods