Chapter:-11Fast Diagramming, Life Cycle Cost
Cost: -The basic anatomy of cost consists of three elements. They are:
1. Direct material cost
2. Direct labor cost
3. Overhead cost
Direct material cost: -
It is the material which goes into the product, process, service or system. The method of identification of this element of cost is that it should have a direct relation with the unit. If for one unit it requires ‘x’ quantity, for two units it should take ‘2x’ quantity.
It may so happen that a material which is not a direct material in one item may be a direct material in another item. It is wise to find as much direct material as possible, but in actual situation, it may not be feasible.
Direct labor cost: -
Based on the mentioned logic, direct labour cost is that cost which can be directly attributed to the item, that is, if one unit requires ‘1 hour’ then two units should take ‘2 hours’.
Overhead cost: -
While the first two costs are easily comprehensible, the third requires more elaboration. The cost elements which cannot be directly associated with a product, process, service or system are considered as overhead. In the absorption costing method, the overhead is divided into:
1. Production overhead
2. Administrative overhead
3. Selling and distribution overhead
