When we looked at costs earlier, we pointed out that the costs for an item are always broken out into five categories: material, labor, burden, overhead, and subcontract. So far, these are the only categories that we have looked at or entered costs for. However, each of these cost categories can be subdivided into an unlimited number of component cost elements.

Some companies need to identify different types of cost within the five standard categories of cost. For example, a company can identify the foreign versus domestic content of material cost. Another company might want freight to be an element of material cost. The needs vary widely, and multiple element costing allows you to break cost categories down further if you need to do so.

The use of cost elements is optional. You only need to introduce cost elements where you want to have additional reporting detail. If you do not add additional cost elements, you will always have at least five elements: material, labor, burden, overhead, and subcontract; one for each category.