Page 107 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes (c) Selling and Distribution Overheads
They include the following things:
(i) Indirect materials used such as packing material, printing and stationery
material, etc.
(ii) Indirect labor such as salaries of salesmen and sales manager, etc.
(iii) Indirect expenses such as rent, insurance, advertising expenses, etc.

5.4 Classification of Cost

Costs can be classified according to:

1. General classification
2. Technical classification

5.4.1 General Classification

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.
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.

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.

Examples: 1. Sales commissions and office rent.
2. Selling and administrative expenses.

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