Lecture 2
(1)Costs Terms, Concepts and Classifications (2) Cost Behavior – Analysis and Use

Costs Terms, Concepts and Classifications

Manufacturing Costs
Direct Materials Direct Labor Manufacturing Overhead

The Product

Direct Materials
Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Example: A radio installed in an automobile

Direct Labor
Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific units produced.
Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work.
Examples: maintenance workers, janitors and security guards.

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

Classifications of Costs
Manufacturing costs are often classified as follows:
Direct Material Direct Labor Manufacturing Overhead

Prime Cost

Conversion Cost

Non-manufacturing Costs
Marketing or Selling Cost Administrative Cost

Costs necessary to get the order and deliver the product.

All executive, organizational, and clerical costs.

Product Costs Versus Period Costs
Product costs include Period costs include direct materials, direct all marketing or labor, and selling costs and manufacturing administrative overhead.

costs.

Inventory Sale

Cost of Good Sold

Expense

Balance Sheet

Income Statement

Income Statement

Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs.