The other costs that are not associated with the production of goods are defined as non-manufacturing

costs.

These costs include:

a. Distribution costs involved in delivering finished products to customers (e.g., freight and salaries of
shipping and delivery personnel).
b. Marketing costs include advertising and promotion expenses.
c. General and administration costs include management salaries, general accounting, legal, and other
costs involved in general administration of the organization.

For example, office rent is a period cost, but factory rent is a product cost (manufacturing overhead). The
trick in identifying a product cost is to ask, “Is this cost caused by production activities.

Some other related cost terms are:

Prime costs: Direct materials used and direct labor

Conversion costs: Direct labor plus manufacturing overhead

Work-in-Process: Cost of goods that are partially completed

In an accounting system, product costs flow from Purchases of Raw Materials to Work-in-Process to
Finished Goods (one inventory account to another — Balance Sheet accounts), and then when the goods
are sold, the item and its cost is transferred from finished goods (Balance Sheet item) to Cost of Goods
Sold (Income Statement item).

Opportunity Costs
Scarcity of resources lead to trade-offs and trade-offs result in opportunity costs. An opportunity cost is the
benefit that is sacrificed when an alternative course of action is taken. For example, opportunity cost of
going to the college is giving up the job and related pay while you get your degree.

Understanding the cost concepts and classifications help management make sound decisions.