Definition
Cost element refers to the cost incurred on the purchase of resources; these resources are used to run the business’s production. The concept of cost element is derived from the ABC costing system, and the supplies/material required in production are the primary cost elements input in the cost pools.
Elements of cost are the primary activities that combine to finalize the product, and these activities fall in the cost pool of the products.
Example of cost elements
Following are the cost elements used information of cost pool – supporting department,
- Salaries of the departmental workers – cost elements
- Utility bills for the department – cost elements
- Other overheads – cost element
It’s important to note that if given cost elements are combined, it results in the formation of the cost pool.
In addition to this, different cost pools are formulated and divided with the level of activities. Other cost pools are divided with respective activities, and the unit cost is obtained.
Types of the cost element
There are two types of cost elements that include primary cost element and secondary cost element.
Primary cost element
These are the cost elements that flow from internal production to financial statements. These cost elements are obtained from the general ledgers used in the generation of the trial balance. The examples of the primary cost elements include,
Cost of goods sold – recorded in the income statement.
Cost of salaries and wages – recorded in the income statement.
Indirect material used – recorded in the income statement.
Secondary cost elements
Secondary cost elements remain in the management accounts, and these cost elements do not flow from internal cost operations to the financial statement. Instead, secondary cost elements are limited to cost accounting and include the cost of overheads.
Conclusion
Cost elements are the basic blocks of the production function. Relevant cost elements are added together, and cost pools are generated that are used to absorb the cost in product formation. Hence, cost elements are used in the ABC system of costing.
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