Page 109 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
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.

Notes 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)

5.4.2 Technical Classification

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:

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.
By Functions

Under this methodology, the costs are classified into various divisions or functions of the
enterprise viz. Production cost, Administration cost, Selling & Distribution cost and so on.
The detailed classification is that total of production cost sub-classified into cost of manufacture,
fabrication or construction.

Example: 1. Costs of manufacture: The cost of materials for packaging, the cost of
electricity and water, the cost of promotion and advertising, etc.
2. Costs of construction: The cost of materials, the cost of equipment,
the cost of labour, etc.
(a) Cost of transportation
(b) Cost of management and co-ordination

(c) Depreciation of fixed assets.
And another classification of cost is commercial cost of operations; which is other than the cost
of manufacturing and production.

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