Under the adsorption-costing approach expenses are separated according to function and then deducted from revenues to arrive at operating income. The two major functional categories of expense are cost of goods sold and operating expenses. These categories correspond to a firm’s manufacturing and nonmanufacturing (marketing and administrative) expenses. Cost of goods sold is the cost of direct materials, direct labor, overhead, to the unit sold. To compute the cost of goods sold, it is first necessary to determine the cost of goods manufactured.