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