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At Style Inc., a clothing manufacturer, Jake, the operations manager, is reviewing the costs.
The same costs can be classified in multiple ways based on their nature, function, and behavior. He begins by grouping them by nature.
He identifies rolls of fabric as material costs, wages of sewing machine operators as labor costs, and factory utilities as overhead costs.
Next, Jake examines costs grouped by function.
He sees that product costs include materials, labor, and factory overhead used to make clothing.
On the other hand, period costs, such as office rent and marketing expenses, are not part of production and are recorded in the period they happen.
Jake then studies how costs behave.
He notices that fixed costs, such as factory rent, remain unchanged regardless of output level.
Variable costs, like fabric, increase or decrease as output changes.
Some costs, like utility bills, are mixed, containing both fixed and variable parts.
By classifying costs this way, Jake can better plan production costs, track expenses, and understand how costs change with output.