In cost classification for business accounting, sales commissions are generally classified as which type of cost?

Introduction / Context:
Cost classification is an important topic in management accounting and cost accounting. Different costs are treated differently for valuation, profit analysis, and decision making. Sales commissions are a typical example of selling and distribution expenses. This question asks how such commissions are classified, which helps you understand the distinction between product costs and period costs.

Given Data / Assumptions:
- The specific expense is sales commissions paid to sales staff or agents. - We are asked for the appropriate cost classification. - Options include period costs, product costs, indirect labour, and overhead costs. - We assume standard cost accounting treatment used in textbooks and exams.

Concept / Approach:
Product costs are costs that are directly tied to manufacturing a product and are inventorised until the product is sold. Period costs, on the other hand, are expensed in the period in which they are incurred and are not attached to specific units of inventory. Selling and administrative expenses, including sales commissions, are classic examples of period costs. Therefore, recognising that sales commissions relate to selling rather than production leads to the correct classification.

Step-by-Step Solution:
Step 1: Identify the nature of sales commissions. They are paid based on sales volume or value and are part of selling activities. Step 2: Recall that selling and distribution expenses are usually treated as period costs because they are matched with the period's revenue rather than with individual units produced. Step 3: Product costs include direct materials, direct labour directly used in manufacturing, and manufacturing overheads, none of which describe commissions paid to sales staff. Step 4: Indirect labour refers to wages of factory workers who are not directly involved in making the product, such as supervisors, but sales commissions are not factory wages. Step 5: Overhead costs, in the strict manufacturing sense, are indirect production costs, not selling commissions. Step 6: Therefore, sales commissions are correctly classified as period costs.

Verification / Alternative check:
Check a cost accounting text or illustration of an income statement by function. Sales commissions always appear under selling and distribution expenses in the operating expenses section, not in cost of goods manufactured. This confirms their treatment as period costs that are expensed in the period incurred rather than inventorised as part of product costs.

Why Other Options Are Wrong:
Product costs relate to manufacturing and are included in inventory valuations until sale, which does not fit sales commissions. Indirect labour refers to support labour in the production department, not sales staff. Overhead costs, in the narrow sense, apply to indirect factory costs such as factory rent and utilities. While one could speak informally of non manufacturing overheads, standard exam terminology treats sales commissions as period costs, not as manufacturing overhead.

Common Pitfalls:
Students sometimes classify all non direct costs as overheads, ignoring the important split between production and non production expenses. Another pitfall is thinking that any cost that varies with output or sales must be a product cost. In reality, variability does not determine whether a cost is a product or period cost; its function in the business does. Remembering that selling costs are period costs helps keep the classification clear.

Final Answer:
Sales commissions are classified as period costs in cost accounting.