Cost which is not related to production and is matched against revenues on a time period basis is called period cost, non manufacturing cost or non-inventoriable cost. Period cost includes marketing or selling cost and administrative cost.
Total Cost of a Trading Concern.
Marketing or Selling Cost. Marketing or selling cost include all costs of marketing research, getting orders and distribution of finished products to consumers. Advertising, sales travel, sales commission and salaries, cost of warehousing finished goods and distribution expenses are examples of these costs.
Administrative Cost. All those costs which cannot be logically included in under either production cost or marketing cost are grouped as administrative cost. Administrative cost includes cost of planning, policy making and controlling operations of enterprise. Examples of these costs include fees of board of directors, general accounting, public relations and other similar costs concerning overall administration of the organization.
This classification of costs is particularly related to cost objective.
Direct Cost. A direct cost is one that can be conveniently and economically identified with a cost objective or can be so associated with a particular segment under consideration.
Indirect Cost. An indirect cost is one that cannot be conveniently and economically identified with a cost objective and must be apportioned to the cost objective or segment under consideration on some equitable basis.
From the above it is clear that the terms direct cost and indirect cost are meaningless unless we have identified the segment for which the cost is being calculated. For example, direct departmental cost and direct cost of a product are the terms that give clear meaning.
A cost may be direct and indirect at the same time depending upon the cost object. For example, salary of a production supervisor and depreciation of a machine are indirect costs with reference to product and are classified as factory overheads. But the same salary and depreciation are direct costs when our cost object is the department where the supervisor works and the machine is installed.
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