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What is a Cost Element?

By A. Leverkuhn
Updated May 16, 2024
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In general, a cost element is just a factor in the cost of some process. For example, the costs of storing material or equipment could be a cost element in general production. Nevertheless, a cost element can mean different things to different people. In the accounting field, a cost element has specific uses within different accounting models.

Accountants sometimes use the phrase “cost element” to refer to a specific ‘function’ within some process. In this case, looking at cost elements helps to control and report costs. This is a general use of the term.

In other situations, a cost element can be part of what’s called activity based costing. Activity-based costing assumes that production requires activities and that activities generate costs. Within this model, accountants refer to cost elements as part of looking at how activities create costs in a business system.

Activity-based costing replaces a simpler system of labor based costing or simple “terms of production” costing. A traditional system might take a specific set of costs for materials, labor, etc., and look at that set of costs contrasted with a volume of production. In activity-based costing, it’s a little bit different. Accountants identify activities and look at how specific parts of a process have their own price tag.

The kinds of activities that accountants look at an activity-based costing are as diverse as the total initiatives in a general business plan. In a lot of companies, production is not a simple process. There’s customer service, warehousing, material purchasing, advertising, and much more. All of these things generally require their own departments or management structures. This is part of why activity-based costing is so popular.

Part of activity-based costing can also include looking at different costs of business facilities. If a business has more than one location, tagging the costs from each location can show accountants and business leaders more about what part of the business is the most expensive. In all of this, cost elements figure into the kind of “detective work” that accountants do to analyze the activities that are costing a business money.

Innovative accounting with cost elements is part of a new strategy for business. Lots of these tasks can be accomplished with the help of sophisticated software. A general “software architecture” helps human business leaders to manage all of the complex data handling that goes on within nearly any kind of business. As software and other tools make greater analysis more accessible, accounting can become more and more complex and sophisticated. Consequently, the business world learns to use a wider set of metrics to look at costs and revenues.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

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