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1. Raw Material
Raw material is main element of cost. Material cost varies from 50% to 70% of the total production cost. Raw materials are converted into finished goods by manufacturing enterprises. For example, cloth is produced from raw cotton, sugar is produced from sugar-cane, and shoes are produced from leather and so on. The amounts spent on the purchase of raw material are referred as raw material cost. Raw material purchase and control system must be adequate. Material control system must be proper. Material control means to ensure that the business has right quantity of material in the right place and at the right time. Material must be purchased at reasonable prices and of superior quality, if material is purchased at higher price or of inferior quality then material cost may be unnecessarily too high. Material must be kept in the store until it is required for production purposes. There must be adequate and efficient system of storekeeping. All the materials purchased must be entered correctly in the stores records and there must be appropriate system of stocktaking.
2. Labor
Labor is another important element of cost. It is normally 15% to 30% of total production cost. The payments made to factory workers for their services are called as labor cost.
A labor cost consists of:-
i. Basic pay i.e. daily, weekly or monthly wages.
ii. Labor related costs e.g. holiday pay, overtime premium, etc.
Labor cost must be also analyzed against the various jobs completed by laborers. It must be ensured that the laborers have really worked for the hours paid to them. It means the laborers should not sit idle during the working hours and they should contribute effectively to increase the production.
Laborers must be paid a fair remuneration for their services and some incentives must be given to them to motivate for hard work.
3. Overheads
Overheads may be defined as costs which do hot result solely from a particular activity. In other words, all those costs which are incurred by the organization as a whole and not for some specific activities are called as overheads. These are the expenses of a business enterprise which are incurred to run the business smoothly. These include rent of the premises, power and electricity, telephone charges, insurance, depreciation, salaries of office staff and so on. Overheads must be reasonable and adequate.
Wilfykil answered the question on April 15, 2019 at 08:57