Cost Classification and Income Statements

Manufacturing overhead

Indirect manufacturing costs that are necessary for the production process but cannot be easily traced to specific products

Direct labor

Labor cost directly involved in the manufacturing or production process

Direct materials

Materials that are directly used in the production of goods and become part of the final product

Raw materials

Materials that are used to create a product but do not become part of the final product

Indirect materials

Minor items considered part of manufacturing overhead, such as lubricants or cleaning supplies

Marginal cost

The cost of producing one additional unit of a product or service

Relevant range

The range of activity or production where fixed costs remain constant

Cost structure

The relative proportion of each type of cost in an organization's overall cost profile

Contribution margin

The sales revenue minus the variable costs, representing the amount available to cover fixed costs and contribute to profit

Average per unit basis

A representation of fixed costs as variable costs, calculated by dividing the total fixed costs by the number of units produced

Contribution approach

An income statement format that distinguishes between fixed and variable costs, providing insights into the contribution margin

Finished goods

Completed units that are ready for sale

Sales commission

Cost based on a percentage of sales revenue, paid to sales representatives or agents

Factory supervisors salaries

Cost of supervisory personnel in the factory who oversee the production process

Factory depreciation

Cost of the decrease in value of factory assets over time, such as buildings or machinery

Direct cost

Cost that can be easily traced to a specific cost object, such as a product or service

Sunk costs

Costs that have already been incurred and cannot be changed or recovered

Work in process

Units that are partially complete but not yet finished

Indirect cost

Cost that cannot be easily traced to a specific cost object and is allocated or assigned based on a predetermined method

Selling costs

Costs associated with selling the product, such as advertising expenses or sales salaries

Product costs

Costs that are directly associated with the production process and flow through inventory accounts

Period costs

Costs that are expensed when incurred and are not part of the inventory, such as administrative expenses or selling expenses

Nonmanufacturing costs

Costs that are not directly related to the production of goods, such as marketing expenses or administrative costs

Differential costs

Costs that differ between two or more alternatives, helping in decision-making

Fixed costs

Costs that remain constant in total regardless of the level of activity or production

Variable costs

Costs that vary in total with changes in the level of activity or production

Cost behavior

How a cost changes as the level of activity or production changes