Cost Classification Edge Cases
Questions that seem contradictory until you apply the frameworks carefully.
Q: Why is factory supervisor salary a product cost but not administrative?
Answer: Location determines product vs. period.
| Role | Location | Classification |
|---|---|---|
| Factory supervisor | Manufacturing floor | Product cost (MOH) |
| HR manager | Corporate office | Period cost (admin) |
Administrative = general management of the organization
Product = incurred in the factory
Q: Why is electricity per machine-hour variable, but machine rental fixed?
Answer: Cost structure, not the item itself.
| Cost Structure | Behavior |
|---|---|
| $2 per machine-hour consumed | Variable (more production = more cost) |
| $8,000/month rental regardless of use | Fixed (same cost at any volume) |
The machine rental is like the hospital diagnostic machine—capacity exists whether you use it or not.
Q: Why is sales commission "variable + selling" not "mixed"?
Answer: Mixed requires a fixed component.
| Structure | Classification |
|---|---|
| $30 per table sold (only) | Pure variable |
| Base salary + commission | Mixed |
If zero tables sold → zero commission cost → pure variable.
Q: Why is overtime indirect when regular assembly labour is direct?
Answer: Traceability, not the worker.
| Cost | Traceable to specific tables? | Classification |
|---|---|---|
| $40 assembly wage per table | Yes—you know which tables | Direct |
| $10,000 overtime across all product lines | No—can't attribute to specific units | Indirect |
The overtime was incurred "when demand was high across all product lines"—you'd have to allocate, not trace.
You could trace overtime with detailed time tracking. The "indirect" classification is a practical choice, not physical impossibility. Modern systems may justify more granular tracking.
Q: Can the same cost be both direct and indirect?
Answer: Yes, depending on cost object.
| Cost | Direct to... | Indirect to... |
|---|---|---|
| Factory manager salary | Manufacturing division | Individual product |
| Battery | Specific vehicle | The factory |
Always ask: "Direct to what?"
Classification Decision Tree
- Where incurred? Factory → product cost path. Elsewhere → period cost.
- Traceable to cost object? Yes → direct. No → indirect.
- Behaviour with volume? Changes proportionally → variable. Constant total → fixed.
Apply all three independently.
North: Where this comes from
- Cost Classification Framework (the three-axis system)
- Cost Object (why the same cost can classify differently)
East: What opposes this?
- Oversimplified Classification (treating costs as having one "true" category)
South: Where this leads
- Exam Problem Solving (apply decision tree systematically)
- Real-World Judgment (when conventions don't fit)
West: What's similar?
- Context-Dependent Classification (same item, different category based on use)