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Elements of cost; prime and overhead cost

Short answer

The three cost elements are material, labour and expenses, each either direct or indirect. Prime cost is the sum of direct material, direct labour and direct expenses, traceable to each unit. Overhead costs are indirect material, labour and expenses, shared across products and allocated.

What are the elements of cost? Discuss briefly on the prime cost and overhead costs.

Elements of cost

The three elements of cost are material, labour and expenses. Each is either direct (traceable to a product) or indirect.

Prime cost

Prime cost is the total of all direct costs of making a product: Prime cost = direct material + direct labour + direct expenses

  • Direct material: cement and steel in a beam.
  • Direct labour: wages of the mason making the beam.
  • Direct expenses: hire charges of a special machine used only for that beam. It varies directly with output and can be traced to each unit.

Overhead cost

Overhead (indirect cost) is the sum of indirect material, indirect labour and indirect expenses. It cannot be linked to a single unit and is spread over products using an allocation rate.

  • Factory overhead: supervision, factory rent, power, depreciation, repair.
  • Administration overhead: office salaries, audit fees, stationery.
  • Selling and distribution overhead: advertisement, sales staff, transport of goods.

Factory cost = prime cost + factory overhead; total cost = factory cost + administration, selling and distribution overheads; selling price = total cost + profit.

✓ Answer checked by Claude Opus 5.5 (high effort)

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