Managerial Accounting & Cost Concepts (Classification)
Thursday, October 6, 2022 10:29 AM
Chapter 1 Page 1
,Cost Classification for Assigning Costs to Cost Objects
Thursday, October 6, 2022 10:32 AM
Cost object
Anything for which cost data are desired. Examples of cost objects are products, customers, geographic
regions, and parts of the organization such as departments or divisions. (p.28)
Direct cost
A cost that can be easily and conveniently traced to a specified cost object. (p.29)
Indirect cost
A cost that cannot be easily and conveniently traced to a specified cost object. (p.29)
Common cost
A cost that is incurred to support a number of cost objects but that cannot be traced to them
individually.
- For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on
the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s
wage is caused by any one passenger taking the flight. (p.29)
A common cost is a type of indirect cost.
Chapter 1 Page 2
, Cost Classifications for Manufacturing Companies
Thursday, October 6, 2022 10:34 AM
MANUFACTURING COSTS
Raw materials
Any materials that go into the final product. (p.29)
Direct materials
Materials that become an integral part of a finished product and whose costs can be conveniently traced
to it. (p.29)
Direct labor
Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (p.30)
Prime cost
Direct materials cost plus direct labor cost. (p.30)
Manufacturing overhead
All manufacturing costs except direct materials and direct labor. (p.30)
Indirect materials
Small items of material such as glue and nails that may be an integral part of a finished product, but
whose costs cannot be easily or conveniently traced to it. (p.30)
Indirect labor
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be
conveniently traced to particular products. (p.30)
Conversion cost
Direct labor cost plus manufacturing overhead cost. (p.197)
NONMANUFACTURING COSTS
Nonmanufacturing costs are often divided into two categories: selling costs and administrative costs
Selling costs
All costs that are incurred to secure customer orders and get the finished product or service into the
hands of the customer. (p.30)
• Sometimes called order-getting and order-filling costs.
• Examples include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of
finished goods warehouses.
• Selling costs can be either direct or indirect costs.
Administrative costs
Chapter 1 Page 3
Thursday, October 6, 2022 10:29 AM
Chapter 1 Page 1
,Cost Classification for Assigning Costs to Cost Objects
Thursday, October 6, 2022 10:32 AM
Cost object
Anything for which cost data are desired. Examples of cost objects are products, customers, geographic
regions, and parts of the organization such as departments or divisions. (p.28)
Direct cost
A cost that can be easily and conveniently traced to a specified cost object. (p.29)
Indirect cost
A cost that cannot be easily and conveniently traced to a specified cost object. (p.29)
Common cost
A cost that is incurred to support a number of cost objects but that cannot be traced to them
individually.
- For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on
the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s
wage is caused by any one passenger taking the flight. (p.29)
A common cost is a type of indirect cost.
Chapter 1 Page 2
, Cost Classifications for Manufacturing Companies
Thursday, October 6, 2022 10:34 AM
MANUFACTURING COSTS
Raw materials
Any materials that go into the final product. (p.29)
Direct materials
Materials that become an integral part of a finished product and whose costs can be conveniently traced
to it. (p.29)
Direct labor
Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (p.30)
Prime cost
Direct materials cost plus direct labor cost. (p.30)
Manufacturing overhead
All manufacturing costs except direct materials and direct labor. (p.30)
Indirect materials
Small items of material such as glue and nails that may be an integral part of a finished product, but
whose costs cannot be easily or conveniently traced to it. (p.30)
Indirect labor
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be
conveniently traced to particular products. (p.30)
Conversion cost
Direct labor cost plus manufacturing overhead cost. (p.197)
NONMANUFACTURING COSTS
Nonmanufacturing costs are often divided into two categories: selling costs and administrative costs
Selling costs
All costs that are incurred to secure customer orders and get the finished product or service into the
hands of the customer. (p.30)
• Sometimes called order-getting and order-filling costs.
• Examples include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of
finished goods warehouses.
• Selling costs can be either direct or indirect costs.
Administrative costs
Chapter 1 Page 3
