ROTMAN SCHOOL OF MANAGEMENT
RSM 1222 – COST DEFINITIONS AND CLASSIFICATIONS
MANUFACTURING COSTS
DIRECT MATERIALS:
Materials that become an integral part of a
finished product and can be conveniently traced
to it.
Fabrics, zippers, buttons, down,
INDIRECT MATERIALS:
Small items of material that may become an
integral part of a finished product but whose
costs of tracing exceed the benefits.
Thread, n colouring dye (the costs of tracing
exceeds the benefits, not easily traceable)
DIRECT LABOUR:
Factory labour costs that can be traced easily to
individual units of product.
Factory workers: cutting, sewing, assembling
INDIRECT LABOUR:
Labour costs of janitors, supervisors, material
handlers and other factory workers that cannot
be conveniently traced directly to a particular
product.
Designer, supervisor of factory, quality assurance,
repair and maintenance,
MANUFACTURING OVERHEAD:
All costs associated with the manufacturing
except direct materials and direct labour.
Cost of machinery, utilities, rent, transportationin, storage cost of raw materials, spoilage
NON-MANUFACTURING COSTS
MARKETING / SELLING COSTS:
All costs necessary to secure customer orders and
get the finished product or service to the
customer.
ADMINISTRATIVE COSTS:
All executive, organizational, and clerical costs
associated with the general management of an
organization rather than with manufacturing,
marketing and selling.
RESEARCH & DEVELOPMENT COSTS:
Costs incurred in the research or development
phase of a product.
Marketing, brand management, advertising
campaign, selling, post sale customer support
and warranty, store cost/online,
HQ cost, admin, accounting, HR
R&D expense
PERIOD VS. PRODUCT COSTS
PRODUCT COSTS:
Include all costs involved in purchase or
manufacture of goods.
PERIOD COSTS:
All costs that are expensed on the income
statement in the period in which they are
incurred or accrued. Selling (marketing) and
administrative expenses are period costs.
All manufacturing cost
All non-manufacturing cost
VARIABLE vs. FIXED COSTS
VARIABLE COST: A cost that varies in total, in
direct proportion to changes in the level of
activity.
Direct material and direct labour
(Variable overhead cost)
FIXED COSTS: A cost that remains constant in
total, regardless of changes in the level of activity
within the relevant range.
Rent of the building, supervisor, repair and
maintenance, insurance, depreciation of
equipment, administrative cost
MIXED COSTS: A cost that has a component that
is fixed and a component that is variable.
Utilities,
Mixed Costs: a cost with fixed AND variable
components