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An overview of different cost classifications used in business and manufacturing contexts. It covers direct and indirect costs, product and period costs, variable, fixed, and mixed costs. examples and learning objectives to help understand each concept.
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Summary of the Types of Cost Classifications
Direct Materials Direct Labor Manufacturing Overhead Classifications of Manufacturing Costs
Example: A radio installed in an automobile
Examples: Indirect materials and indirect labor 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.
Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost
Understand cost classifications used for assigning costs to cost objects: direct costs and indirect costs.
Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.
Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement
Cost Classifications for Predicting Cost Behavior
A cost that varies, in total, in direct proportion to changes in the level of activity.Your total texting bill may be based on how many texts you send. Number of Texts Sent Total Texting Bill
A cost that remains constant, in total, regardless of changes in the level of the activity.Your monthly contract fee for your cell phone may be fixed for the number of monthly minutes in your contract. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee