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Unformatted text preview: Cost Behavior and Definitions Cost Measurement Terminology Di rect costs are items that can be feasibly identified with the production of specific goods, for example, direct materials and direct labor.- Di rect Labor costs are controlled by supervisor, since the supervisor controls the productivity of employees. Examples include wages paid to a factory machine operator, because they are identifiable with a finished product. In contrast, a supervisors salary is not identifiable with the production of finished goods and is considered a part of factory overhead. I ndirect costs include items like factory overhead that cannot be traced to a specific product, but are allocated to all products produced. Inventoriable costs , also called product costs , are capitalized as part of finished goods inventory and are regarded as assets before the products are sold. Contrast this treatment with that of period costs , which are expensed as they are incurred and are not capitalized as assets. Under an absorption costing system, inventoriable costs include both variable and fixed costs of production. Under variable costing , inventoriable costs include only variable production/manufacturing costs: direct materials, direct labor, and variable manufacturing overhead. The distinction between absorption (full) and variable (direct) costing is in treatment of fixed manufacturing costs. - Absorption costing treats fixed costs as product costs by allocating them to inventory and COGS. - Variable costing treats all fixed costs as period costs by expensing them as incurred. Both variable and absorption costing exclude selling and administrative expenses from the calculation of gross profit and contribution margin....
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This note was uploaded on 02/01/2009 for the course ACTG 6610 taught by Professor Ward during the Spring '09 term at Middle Tennessee State University.
- Spring '09