Accounting cost elements are the cost types that a business will incur and the costs that are collected for cost accounting.
These are the things that the Cost Accountant types get all excited
about. They spend a lot of time digging into the details of each of
Cost Accountants need an easy way to analyze these costs, so the costs are separated into different cost element categories. These categories or cost types are direct labor, indirect labor, material cost, burden cost and administrative cost.
Direct labor is the wage amount paid to those employees directly involved in the manufacture of the product or service, such as an assembler or machinist. Direct labor costs get a lot of scrutiny. This is a cost that management can control and the Cost Accountant is asked to report on the direct labor cost per part, direct labor downtime, and improvement trends in labor.
Indirect labor is the labor that is indirectly involved in a product or service, such as a fork truck driver or machine repair. These costs too are controllable and management constantly reviews the costs and looks for ways to be more efficient. Some of the analysis the Cost Accountant will do is: what savings will be realized by going to two 10 hour days instead of three eight hours shifts, what savings are available if we hire outside contractors to rebuild machinery, etc.
The material cost is the cost of direct materials that go into making the product. This cost is analyzed to minimize the scrap amount. Scrap can occur in the production process or in the material handling process. The purchasing department is tasked to keep the costs of the purchased material low and to try and achieve cost reductions on this material.
Burden costs are accounting costs that are not direct product costs. These include building rent, health insurance, utility costs, etc. Administrative costs are the costs related to administrative functions, such as sales people salaries, upper management, etc. Management watches these costs, but controlling these costs is not as easy as the production costs, since a lot of these costs are considered to be fixed costs. Fixed costs are like building rent and taxes.
Once the accounting costs are defined, these costs can be collected and then reported to management.
Costs can be reported by part, or for the entire plant and can be generated for any period of time. These reports are reviewed by management and often result in management decisions for change or improvements.
A thorough analysis of costs is usually the job of the Cost Accountant. The Cost Accountant works for and reports to the management of the company. Unlike other accounting information, the cost information for individual products or services is secret and only reported to management. If the competition knew the cost of other businesses, they would have an unfair advantage when quoting on new work.