Classify cost on the basis of element.

Cost can be classified on the basis of element into three main categories:

1. Material Cost: This includes all costs incurred on materials used in the production process. It can be further divided into:

   • Direct materials: Directly used in the production of goods (e.g., cloth for a garment factory).
   • Indirect materials: Used in the production process but not directly part of the final product (e.g., lubricants, cleaning materials).

2. Labour Cost: This includes all costs incurred on labour, both direct and indirect. Examples include:

   • Direct labour: Wages paid to workers directly involved in production.
   • Indirect labour: Wages paid to workers not directly involved in production (e.g., supervisors, security guards).

3. Expenses: These are costs incurred for running the business, excluding material and labour costs. Examples include:

   • Direct expenses: Costs directly related to production (e.g., royalty, hire charges).
   • Indirect expenses: Costs not directly related to production (e.g., rent, depreciation, insurance, repairs, power, and administrative expenses).