Question

1. What are the three major elements of product costs in a manufacturing company?
2. Explain the difference between a product cost and a period cost.
3. Distinguish between (a) a variable cost, (b) a fixed costs, and (c) a mixed cost AND provide an example of a product/service that contains each of the three different types of costs.

Answer 1

*	The three major elements of product costs in a manufacturing company are :-
1	Direct Material : These are the material that are consumed in production of any product
2	Direct Labor : Direct Labor is the labor that is utilized in production
3	Manufacturing Overheads : The cost incurred in production other than Direct Material and Direct Labor.
**	Difference between Product Cost and Period Cost :-
	Product Cost is the cost that is directly related to the production. Product Cost incur only when the product is produced .
	Example of Product cost is : Direct Materal, Direct Labor , Factory overhead
	Period Cost are not linked with Product directly. These are not assigned to one particular product. These are associated with passage of time.
	Example of Period Cost : Salary , Rent etc
***	Variable Cost :- Cost that changes with the change in level of activity is called variable cost. For Example : Direct Material , Direct Labor etc.
	Fixed Cost :- Cost that do not change , in total, with the change in level of activity is called Fixed Cost. For example : Rent , Salary etc
	Mixed Cost : A cost which include both Fixed and Variable cost is called Mixed Cost. For Example : Salary of Manager is $ 600 per month + $ 20 per unit sold. Here $ 600 is Fixed cost and $ 20 per unit sold is Variable cost, in total it is mixed cost.
	Example that contain each of three different types of cost :-
	XYZ company manufactures tables . Following cost incurred for the production for the year :
		per unit	Total
	Direct Material	$ 25
	Direct Labor	$ 10
	Salary		$ 20,000 + $ 20 per unit sold
	Rent		$ 10,000
	Here in the above example :-
#	Classification of the above costs as per variable fixed and mixed cost :
	Variable cost
	Direct Material	$ 25 per unit
	Direct Labor	$ 10 per unit
	Fixed Cost
	Rent	$ 10,000
	Mixed Cost :-
	Salary		$ 20,000 + $ 20 per unit sold
#	Classification of the above costs as per periodic and prouct cost :-
	Product Cost :-
	Direct Material	$ 25 per unit
	Direct Labor	$ 10 per unit
	Salary	$ 20 per unit
	Periodic Cost :-
	Salary	$ 20,000
	Rent	$ 10,000