Answered: Explain Classifying Costs for…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter11: Strategic Cost Management

Section: Chapter Questions

Problem 13DQ

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Question

Explain Classifying Costs for Manufacturing Environments?

Expert Solution

Step 1

The costs are classified in the manufacturing environment as follows:

Based on nature:

Direct Material cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Step 2

Direct labor cost: The costs that are related to the labor employed in the manufacturing process are known as direct labor costs. The direct labor costs include not only wages of employees, but also worker’s compensation, life and medical insurance, payroll taxes, training costs, and pension contributions.
Expenses: All remaining expenses.

Step 3

Based on function:

Manufacturing overhead costs: The costs, which do not relate directly to the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs. Manufacturing overhead cost per unit is the cost of manufacturing overhead incurred to produce one unit of product.
Commercial cost: It includes administration, selling, and distribution expenses.

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