CLASSIFICATION OF COSTS: Manufacturing
We first classify costs according to the three elements of cost:
a) Materials b) Labour c) Expenses
Product and Period Costs: We also classify costs as either
1 Product costs: the costs of manufacturing our products; or
2 Period costs: these are the costs other than product costs that are charged to,
debited to, or written off to the income statement each period.
The classification of Product Costs:
Direct costs: Direct costs are generally seen to be variable costs and they are called direct
costs because they are directly associated with manufacturing. In turn, the direct costs can
Direct materials: plywood, wooden battens, fabric for the seat and the back, nails,
Direct labour: sawyers, drillers, assemblers, painters, polishers, upholsterers
Direct expense: this is a strange cost that many texts don't include; but
(International Accounting Standard) IAS 2, for example, includes it. Direct
expenses can include the costs of special designs for one batch, or run, of a
particular set of tables and/or chairs, the cost of buying or hiring special machinery
to make a limited edition of a set of chairs.
Total direct costs are collectively known as Prime Costs and we can see that Product
Costs are the sum of Prime costs and Overheads.
Indirect Costs: Indirect costs are those costs that are incurred in the factory but that cannot
be directly associate with manufacture. Again these costs are classified according to the
three elements of cost, materials labour and overheads.
Indirect materials: Some costs that we have included as direct materials would be
Indirect labour: Labour costs of people who are only indirectly associated with
manufacture: management of a department or area, supervisors, cleaners,
maintenance and repair technicians
Indirect expenses: The list in this section could be infinitely long if we were to try to