Page 18 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 1: Introduction to Cost Accounting

Notes
Example: Rent of the factory, salesmen salary and so on.
Common costs are shared by multiple segments.

Example: Manufacturer of chairs, Segments = Plastic chairs (P) & Wood chairs (W)

Manufacturing vs. Non-manufacturing Costs

Manufacturing costs are product costs consisting of Direct Material (DM), Direct Labor (DL) and
Manufacturing Overhead (MOH, OH)
Manufacturing Costs = DM + DL + MOH

Non-manufacturing costs are period costs incurred in selling and administrative activities.

Note MOH = All indirect manufacturing costs, including:
1. Indirect materials
2. Indirect labor — supervision, maintenance, janitorial, etc.

3. Other services — utilities, supplies, rent, insurance, depreciation, taxes, etc. used in
production

4. Anything that is related to production (cafeteria, fitness room, etc.)

1.7.2 Technical Classifi cation

Apart from this classification the costs are also classified into various categories according to the

purpose and requirements of the firm. Some of the most important classifications are as follows:
1. By nature or element or analytical segmentation
2. By functions
3. Direct and indirect cost
4. By variability

5. By controllability
6. By normality

7. By time
8. According to planning and control
9. For managerial decisions

Let us understand each of them one by one.

By Nature or Element or Analytical Segmentation

The costs are classified into three major categories Materials, Labour, and Expenses.

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