Cost classification by nature classifies costs according to their relation to cost units as which pair?

Cost classification by nature classifies costs according to their relation to cost units as which pair?

• A. Direct costs and indirect costs
• B. Fixed costs and variable costs
• C. Product costs and period costs
• D. Sunk costs and opportunity costs

Answer: (A)

The key idea here is whether a cost can be traced directly to a specific cost unit. When a cost can be linked to a particular product or cost unit, it’s a direct cost. If it cannot be traced to a single unit, it’s an indirect cost and needs to be allocated across units, often as overhead. This distinction—traceable (direct) versus not traceable (indirect)—is what “cost classification by nature” uses. Examples help: the wages of workers who directly assemble a product are a direct cost, while the factory maintenance, depreciation, and utilities that support production but aren’t tied to any one unit are indirect costs. The other pairings describe different ideas. Fixed versus variable relates to how costs change with activity level, not whether they can be traced to a cost unit. Product versus period splits costs by function or timing rather than traceability. Sunk versus opportunity costs involve different concepts of cost in decision making and do not address how costs relate to cost units.

The key idea here is whether a cost can be traced directly to a specific cost unit. When a cost can be linked to a particular product or cost unit, it’s a direct cost. If it cannot be traced to a single unit, it’s an indirect cost and needs to be allocated across units, often as overhead. This distinction—traceable (direct) versus not traceable (indirect)—is what “cost classification by nature” uses.

Examples help: the wages of workers who directly assemble a product are a direct cost, while the factory maintenance, depreciation, and utilities that support production but aren’t tied to any one unit are indirect costs.

The other pairings describe different ideas. Fixed versus variable relates to how costs change with activity level, not whether they can be traced to a cost unit. Product versus period splits costs by function or timing rather than traceability. Sunk versus opportunity costs involve different concepts of cost in decision making and do not address how costs relate to cost units.