In cost accounting, sales commissions paid to the sales force are generally classified as which type of cost?

Introduction / Context:
This question comes from basic cost and management accounting. It asks how sales commissions should be classified. For exam purposes, it is important to distinguish between product costs, which are tied to producing goods, and period costs, which are linked to time periods and are expensed in the period in which they are incurred. Sales commissions are a typical example used to test this classification.

Given Data / Assumptions:

• The cost item in question is sales commissions paid to sales staff.
• The context is cost classification in accounting.
• Options include period costs, indirect labour, overhead, product costs, and direct material.

Concept / Approach:
Product costs include direct material, direct labour, and manufacturing overhead. These costs are attached to units of goods and become part of inventory until the goods are sold. Period costs include selling, distribution, and administrative expenses that are related to time periods rather than individual units. Sales commissions arise only when sales are made and are part of selling and distribution expenses. Therefore, they are treated as period costs rather than product costs.

Step-by-Step Solution:
Step 1: Identify whether sales commissions are incurred in the factory or in the selling function.Step 2: Realise that these payments are linked to the selling activity, often based on a percentage of sales.Step 3: Selling and distribution costs are typical period costs and are not included in the cost of inventory.Step 4: Therefore, sales commissions should be classified as period costs, specifically as selling expenses.Step 5: Choose the option that states period costs as the classification.

Verification / Alternative check:
In standard cost sheets, product costs stop at the cost of goods manufactured. Afterwards, a separate section called selling and distribution overhead is added to arrive at the cost of sales. Sales commissions appear in this later section, confirming that they are not part of manufacturing cost or product cost. In income statements, they are typically expensed in the period in which the related sales occur, again showing their period cost nature.

Why Other Options Are Wrong:
Indirect labour refers to wages of factory workers who are not directly engaged in production, such as supervisors or maintenance staff, not sales personnel. Manufacturing overhead includes factory related indirect expenses, not selling costs. Product costs are those that are capitalised as inventory; including sales commissions there would overstate inventory value. Direct material costs cover raw materials and components, which is clearly different from sales commissions.

Common Pitfalls:
A common error is to treat any cost that varies with the level of sales or production as a product cost. While sales commissions do vary with sales volume, they are linked to selling activity, not to manufacturing activity. Another pitfall is ignoring the location and function where the cost arises. A good rule is to ask whether the cost could exist even if there were no manufacturing, but only trading. Sales commissions would still exist in a pure trading firm, which confirms that they are not manufacturing product costs.

Final Answer:
Sales commissions are generally classified as period costs (selling and administrative expenses) in cost accounting.