Treatment of Costs
Accounting (Year 12) - Cost Accounting
What is the treatment of costs?
Treatment of costs refers to the linkage of a cost to a product or service. These are classified as product or period costs.
Product costs are any costs linked to the manufacture of a product or a service. Anything directly related to the production of a good or delivery of a service is a product cost.
The formula of Product Cost = Direct Materials + Direct Labour + Factory Overhead (Indirect Materials + Indirect Labour).
Examples of product costs include:
Cotton in a clothing production
Glue used in shoe production
Factory worker wages in a cannery
Period costs are any costs that are not linked to the manufacture of a product or a service. Do not get these confused with indirect costs, indirect costs can also be linked to the manufacture of a product. Period costs are costs that have no obvious relationship to a production of a good or delivery of a service.
Some period costs can include:
Interest on loans