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Direct
It is a cost that can be traced in full to a product.
cost
Indirect A cost that is incurred in the course of making or providing a
cost product which cannot be traced in full to it.
It may be further classified as:
Overheads
$
Basic pay for normal hours worked 36 hours x $4 144
Pay at the basic rate for overtime 6 hours x $4 24
O/T premium with overtime paid at 1¼ ¼ x 6 hours x $4 6
Bonus payment under group bonus scheme 30
Total gross wages 204
What is the direct labor cost for this employee in week 5?
Functional costs
Production Costs incurred by the sequence of production.
costs
Administration Costs of managing an organization.
costs
Selling costs Costs of creating demand for products and securing
firm orders from customers. Also known as marketing
costs.
Distribution Cost incurred by the sequence of making products
costs ready for despatch and delivering to customers.
2
Cost classification
Ref No.
1 Cost of oils used to lubricate production machinery
2 Motor vehicle licenses for lorries
3 Depreciation of factory plant and equipment
4 Cost of chemicals used in laboratory
5 Commission paid to sales representatives
6 Salary of the secretary to the finance director
7 Trade discounts given to customers
8 Holiday pay of machine operatives
9 Salary of security guard in raw material stores
10 Fees to advertising agency
11 Rent of finished goods warehouse
12 Salary of scientist in laboratory
13 Insurance of a company's premises
14 Salary of supervisor working in a factory
15 Cost of typewriter ribbons in the general office
16 Protective clothing for machine operatives.
Required: Complete the following table by placing each expense in the correct cost classification.
Rent
Depreciation
Insurance
A variable cost is a cost which tends to vary directly with the volume of
output. The variable cost per unit is the same amount for each unit
produced. E.g.
Direct materials
Sales commission
Hourly rate wages
Telephone charges
Revenue based rent
Car rental
Production costs
Direct material / labor / expenses
Production overhead
This is important as it affects the preparation of accounts. If 80 units were sold at $40, the gross profit will be:
$
Sales (80 x 40) 3,200
Cost of sales (80 x 21) -1,680
Gross profit 1,520
The value of the closing stock will be $420 (20 x 21).
5
Cost classification
Investment center