Some cost accounting keywords

Costs can also be classified as either product or period costs. Product costs are related to making or acquiring the products or providing the services that directly generate the revenues of an entity; period costs are related to other business functions such as selling and administration. 

 

Product costs are also called inventoriable costs and include the cost of direct material, direct labor, and overhead. Any readily identifiable part of a product (such as the clay in a vase) is a direct material. Direct material includes raw materials, purchased components from contract manufacturers, and manufactured subassemblies. 

 

Direct labor refers to the time spent by individuals who work specifically on manufacturing a product or performing a service. At WF&B, the people handling the polyethylene material for storage bags are considered direct labor and their wages are direct labor costs. Any factory or production cost that is indirect to the product or service and, accordingly, does not include direct material and direct labor is overhead. 

 

This cost element includes factory supervisors’ salaries, depreciation on the machines producing plastic food storage bags, and insurance on the production facilities. The sum of direct labor and overhead costs is referred to as conversion cost.