What product cost categories exist and what items compose these categories? Product costs are related to the products or services that generate an entity’s revenues. These costs can be separated into three components: direct material, direct labor, and production overhead. A direct cost is one that is distinctly traceable to a specified cost object. A cost object is anything of interest or useful informational value, such as a product, service, department, division, or territory. Costs that must be allocated or assigned to a cost object using one or more predictors or cost drivers are called indirect (or common) costs.

Different cost objects may be designated for different decisions. As the cost object changes, the costs that are direct and indirect to it may also change. For instance, if a production division is specified as the cost object, the production division manager’s salary is direct. If, instead, the cost object is a sales territory and the production division operates in more than one territory, the production division manager’s salary is indirect. In manufacturing, quality costs may be variable in relation to the quantity of defective output, step fixed with increases at specific levels of defective output, or fixed. Rework cost approaches zero if the quantity of defective output is also nearly zero. However, these costs would be extremely high if the number of defective parts produced were high. In contrast, training expenditures are set by management and might not vary regardless of the quantity of defective output produced in a given period.

Keyword terms :