Page 16 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 1: Introduction to Cost Accounting

Self Assessment Notes

State whether the following statements are true or false:

15. The wages of that labour which cannot be allocated but which can be apportioned to or
absorbed by, cost centres or cost units is known as direct labour.

16. Overheads may be defined as the cost of indirect materials, indirect labour and such other

expenses including services as cannot conveniently be charged direct to specific cost units.

1.7 Classification of Costs
Costs can be classified according to

1. General classifi cation
2. Technical classifi cation

1.7.1 General Classifi cation

Generally, the costs are classified as follows:

Product vs. Period Costs

Product costs include all the costs that are involved in acquiring or making product. For a
manufacturer, they would be the direct materials, direct labor, and manufacturing overhead
used in making its products. Product costs are viewed as “attaching” to units of product as the
goods are purchased or manufactured and they remain attached as the goods go into inventory
awaiting sale. So initially, product costs are assigned to an inventory account on the balance
sheet. When the goods are sold, the costs are released from inventory as expense (typically called
Cost of Goods Sold) and matched against sales revenue.

!

Caution The product costs of direct materials, direct labor, and manufacturing overhead
are also “inventoriable” costs, since these are the necessary costs of manufacturing the
products.

The purpose is to emphasize that product costs are not necessarily treated as expense in the
period in which they are incurred. Rather, as explained above, they are treated as expenses in
the period in which the related products are sold. This means that a product cost such as direct
materials or direct labor might be incurred during one period but not treated as an expense until
a following period when the completed product is sold.

Note 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 fi nancial accounting.

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