General Cost Classifications

 Manufacturing Costs:

Manufacturing costs can be classified into three broad categories:

1.Direct Materials: Raw materials that become an integral part of the product and that can be conveniently traced directly to it. For example: A radio installed in an automobile.

2.Direct Labor: Those labor costs that can be easily traced to individual units of product. For example: Wages paid to automobile assembly workers.

3.Manufacturing Overhead: Manufacturing costs that cannot be traced directly to specific units produced. For example: Indirect materials and indirect labor.

Indirect Materials: Materials used to support the production process. For example: lubricants and cleaning supplies used in the automobile assembly plant.

Indirect labor: Wages paid to employees who are not directly involved in production work. For example: maintenance workers, janitors and security guards.

Nonmanufacturing Costs:

Nonmanufacturing costs are often divided into two categories:

1.Selling Costs: Costs necessary to secure the order and deliver the product.

2.Administrative Costs: All executive, organizational, and clerical costs associated with the general management of the organization.

Product Costs Versus Period Costs

Prime Cost and Conversion Cost

 Prime Cost is the sum of direct materials cost and direct labor cost.

 Conversion cost is the sum of direct labor cost and manufacturing overhead cost.