Page 38 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes

Notes Manufacturing overhead is also referred to as factory overhead, indirect
manufacturing costs, and burden.

period costs are not included as part of the cost of either purchased or manufactured goods and
are usually associated with the selling function of the business or its general administration. As a
result, period costs cannot be assigned to the products or to the cost of inventory. These costs are
expensed on the income statement in the period in which they are incurred, using the usual rules
of accrual accounting that we learn in financial accounting.

Example: 1. Sales commissions and office rent.

2. Selling and administrative expenses.
The period costs are reported as expenses in the accounting period in which they
1. best match with revenues,
2. when they expire, or
3. in the current accounting period.
In addition to the selling and general administrative expenses, most interest expense is a period
expense.
Direct vs. Indirect Costs: Direct costs are those costs that can be traced to specific segments of
operations.
Direct cost of the product can be classified into the following categories:
1. Direct Material: Direct material which is especially used as a major ingredient for the
production of a product.

Example: (a) The wood is a basic raw material for the wooden furniture. The cost of the
wood procured for the furniture is known direct material cost.

(b) The cotton is a basic raw material for the production of yarn. The cost of procuring the
cotton is known as direct material for the manufacturing of yarn.
2. Direct Labour: Direct labour is the cost of the labour which is directly involved in the
production of either a product or service.

Example: The cost of an employee who is mainly working for the production of a
product/service at the centre, known as direct labour cost.
3. Direct Expenses: Direct expenses which are incurred by the firm with the production of
either a product or service. The excise duty and octroi duty are known as direct expenses
in connection with the production of articles and so on.
Indirect costs are those costs that can not be identified with particular segments.
4. Indirect Material: The material which is spent cannot be measured for a product is known
as indirect material.

Example: The thread which is used for tailoring the shirt cannot be measured or quantified
in specific length as well as ascertained the cost.

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