Question

How does a product cost differ from a general, selling, and administrative cost? Give a short example of each.

Answer 1

Solution: An organization in order to sustain, needs to operate with objective of maximizing profit and minimizing costs.

When an organization undertakes production process of goods, it incurs product costs. It records costs of material, labor, factory overheads directly incurred in the process of finishing goods or rendering services to the customers. Product costs are dependent on inventory and production line basis. For instance, maintaining costs in recording supplies for production process.

General costs are which are incurred by an organization for day to day activities and are separate from other costs. For instance, rent of the land/building of the factory where goods are produced, these costs are independent of level of production and their costs and revenue generation, they are to be paid each month for acquiring such space by an organization for business.

Selling expenses are costs that are allocated for transmitting details/information about the goods/service, selecting distribution channels and making the goods/service available to the customers at right time and at right place, in order to survive in cut throat competition of operating in global market. For instance, expenses incurred in advertising of goods of an organization.

Administrative costs are not recorded in alignment with marketing, financing and production activities transactions. They are the costs, for instance accounting clerks wages, which are for maintaining and regulating organization's activities and transactions.