Can Anyone Explain The Classification By So Called Cost Element?

The classification of costs according to the three major functions or activities of an enterprise is not very useful because it does not provide necessary information for managerial control. a further classification or grouping is necessary. This classification breaks down or separates the total factory cost under three broad headings. These heading are direct material, direct labor and factory overhead. These three groups of expenditure are called the elements of cost.

There are three main reason of this classification. Generally the first two cost element; direct material and direct labor are typically large in amount as compared with other costs and this necessitates that they be give separate attention in cost determination and control. The three cost element; direct material, direct labor and factory overhead require distinct methods of record keeping. The classification aids management immensely in cost determination, cost control and cost analysis.

In fact this classification involves the distinction between direct and indirect costs. Material and labor are direct costs whereas factory overhead is indirect cost. Direct cost represents that cost which can be directly or definitely associated, traced or identified with the object of costing where as indirect cost is that cost which cannot be directly identified to the object of costing.