COST CLASSIFICATIONS: Costs have been described as either product costs or period costs. Product costs have three specific classifications. Discuss and give examples. 2. COST FLOWS: Explain how...

1. COST CLASSIFICATIONS: Costs have been described as either product costs or period
costs. Product costs have three specific classifications. Discuss and give examples.
Product Costs has three specific classifications as follows:
- Direct Materials: It is the material used for manufacturing a product. The raw
material, which is directly attached to that product and becomes integral part of the
product is called direct material. In manufacturing a table, the wood used to
manufacture it is direct material. Similarly cloth used to make a pant / shirt is direct
material for this product.
- Direct Labor: It the labor cost directly used in manufacturing the product. The labor
hours used in manufacturing the table or the hours used in cutting/ stitching the shirt /
pant can be easily traced. Since these labor costs can be easily traced to each product,
it is known as direct labor.
- Manufacturing Overhead – it is the expenses used in manufacturing a product but
cannot be easily traced to each unit. Therefore these costs are allocated on the basis of
a cost driver, and known as manufacturing overhead. Indirect material like screws,
nails, gum pastes used in manufacturing a table or thread used in stitching the shirt /
pant are included in manufacturing overhead. Similarly factory lighting, property tax,
security guard wages are some overheads, which cannot be directly traced and
therefore included and allocated as manufacturing overhead.
2. COST FLOWS: Explain how manufacturing costs flow through a manufacturing process.
In your discussion relate the three product cost classifications to the cost flows: when are they
introduced? How are they tracked? Can a cost classification appear in more than one part of
the cost flow?
Manufacturing cost is direct cost and indirect cost. There are three types of costs: Direct
Material, Direct labor and Manufacturing overhead. All these costs are paid in cash
except depreciation, which is a non-cash expense.
Direct cost is the cost of manufacturing, which can be directly traced to the product.
Direct Material cost is the material used in the manufacturing of goods. Cost of labor that
is directly associated to that product is direct labor.
Factory overhead is the other manufacturing expenses, incu
ed during the manufacturing
ut cannot be directly associated to the product.
Administrative and selling cost – is the cost incu
ed for administration of factory and
head office and selling expense for sale of finished products.
When all these costs are clu
ed it becomes product cost. Product cost is used for
inventory valuation and cost of goods sold valuation. There are three main methods for
this valuation:
 First In First Out (FIFO)
 Last In First Out (LIFO)
 Average cost Method
3. COST BEHAVIORS: Discuss the different cost behaviors: variable, fixed, mixed, and step.
Cost are classified as per the behavior. There are four types of costs:
 Variable – this is a cost which is fixed per unit. Hence it will increase /
decrease proportionately as per the increase or decrease in the volume of
production.
 Fixed – Fixed cost will remain same at relevant range of production.
Hence within relevant range number of units may vary, the fixed cost will
not change. Therefore per unit cost will increase with decrease in units
produced and per unit cost will increase with decrease in units produced.
 Mixed – Mixed cost has both the variables of variable cost and fixed cost.
The best example of this cost is electricity expense. In this expense fixed
charges are billed i
espective of number of electricity consumed, and
variable charges are billed as energy charges for the electricity consumed.
 Step – Step cost is the cost which increases as per the increase in steps. In
this method costs are charges in steps like the example given below:
0 to 100 units $1,200
101 to...