1. Manufacturing
Answer: Manufacturing is the process of producing goods using raw materials, labor, and
machinery. It involves transforming raw materials into finished products.
Realistic Scenario: A company like Maruti Suzuki assembles various parts like engines, chassis,
and tires in a factory to produce cars.
2. Merchandising
Answer: Merchandising involves buying finished goods and reselling them without altering
them. It focuses on sales rather than production.
Realistic Scenario: A supermarket purchases packaged snacks from a supplier and sells them to
customers at a markup.
3. Direct Materials
Answer: Direct materials are raw materials that can be physically and directly traced to the
finished product.
Realistic Scenario: In a furniture factory, the wood used to make a table is a direct material.
4. Direct Labor
Answer: Direct labor includes wages of workers who are directly involved in manufacturing the
product.
Realistic Scenario: A tailor sewing shirts in a garment factory earns direct labor wages.
5. Manufacturing Overhead
Answer: These are all indirect manufacturing costs like utilities, factory rent, and indirect wages.
Realistic Scenario: The electricity used in running machines in a shoe factory is part of
manufacturing overhead.
6. Indirect Materials
Answer: Materials used in production but not directly part of the product are indirect materials.
Realistic Scenario: Glue and screws used to assemble a cupboard, but not easily measured per
unit, are indirect materials.
7. Indirect Labor
Answer: Wages paid to workers who assist in production but don't directly work on the product
are indirect labor.
Realistic Scenario: A maintenance worker who repairs machines in a factory is an example of
indirect labor.
8. Prime Cost
Answer: Prime cost = Direct Materials + Direct Labor. It represents the core cost of
manufacturing.
Realistic Scenario: In a bakery, flour (direct material) + baker’s wages (direct labor) are
considered prime cost.
9. Conversion Cost
Answer: Conversion cost = Direct Labor + Manufacturing Overhead. It’s the cost of converting
raw materials into finished products.
Realistic Scenario: A pottery studio includes the potter’s wages and kiln electricity costs as
conversion costs.
10. Marketing and Selling Cost
Answer: Costs to promote, sell, and deliver the product are marketing and selling costs.
Realistic Scenario: A food delivery startup pays for social media ads and delivery charges to
reach customers.
11. Administrative Cost
Answer: These are costs related to managing the business, not tied to production or sales.
Realistic Scenario: The salary of the HR manager in a pharmaceutical company is an
administrative cost.
12. Product Cost
Answer: Product costs include direct materials, direct labor, and manufacturing overhead.
These are inventoried until sold.
Realistic Scenario: In a bicycle company, the steel frame, worker wages, and machine
maintenance are all product costs.
13. Period Cost
Answer: Period costs are non-manufacturing costs expensed in the period they occur.
Realistic Scenario: A monthly internet bill for the company’s head office is a period cost.
14. Variable Cost
Answer: Variable costs fluctuate with production levels. More output means higher total
variable cost.
Realistic Scenario: In a bottled water plant, the cost of plastic bottles increases with the
number of bottles produced.
15. Fixed Cost
Answer: Fixed costs remain unchanged regardless of production levels within a certain range.
Realistic Scenario: A factory's monthly lease payment stays the same whether they produce
500 or 5,000 units.
16. Direct Cost
Answer: Costs that can be directly traced to a product, department, or project are direct costs.
Realistic Scenario: The paint used for car production in an automobile factory is a direct cost.
17. Indirect Cost
Answer: Costs that cannot be directly traced to one specific product or activity.
Realistic Scenario: Cleaning staff wages shared by the entire factory are indirect costs.
18. Opportunity Cost
Answer: The benefit lost from not choosing the next best alternative.
Realistic Scenario: If a company uses land for a warehouse instead of leasing it out, the rental
income forgone is the opportunity cost.
19. Sunk Cost
Answer: A past cost that has already been incurred and cannot be recovered.
Realistic Scenario: Money spent on developing a prototype that was never launched is a sunk
cost.
20. Freight Cost
Answer: Freight cost is the transportation expense for bringing goods to or from the business.
Realistic Scenario: A grocery wholesaler pays truck charges to deliver vegetables from the farm
to their store.