one of the central objective of a cost management system is the calulation of product costs for external financial reporting. For product-costing purposes, externally imposed conventions dictate the cost be classified in terms of the specail purposes,or functions,they serve. Costs are subdivided into two major functional categories: production and nonproduction. Production costs are those costs associated with the manufacture of goods or the provision of services. Nonproduction costs are those costs associated with the functional of designing, developing, marketing, distribution,customer service,and general administration. Nonproduction costs are often divided into two general categories: selling costs,which are the costs of marketing,distribution,and customer service; and administrative costs, which are the cost of designing, developing, and general adminstration.
For tangible goods, production and nonproduction costs are often refered to as manufacturing costs and nonmanufacturing costs, respectively. Product costs can be further classified as direct materials, direct labor, and overhead. Only these three cost elements can be assigned to products for external financial reporting.