What are Indirect Manufacturing Costs?

//What are Indirect Manufacturing Costs?
What are Indirect Manufacturing Costs? 2017-10-05T02:44:37+00:00

Definition: Indirect manufacturing costs are expenses incurred in the production process that can’t be traced back to a specific part or cost object. In other words, they are costs that are not directly linked to the cost object in a manufacturing process.

What Does Indirect Manufacturing Costs Mean?

What is the definition of indirect manufacturing costs? In a manufacturing company, a cost object is anything for which a cost can be allocated. Direct costs of a manufacturing firm are typically direct materials and direct labor. Indirect manufacturing costs are sometimes called manufacturing overhead. Examples of these costs include utilities, rent, and machinery maintenance. Certain labor can also be indirect, like secretaries and maintenance workers.

When determining how costs in a manufacturing business will be assigned, direct costs are easy to assign because they have a direct relationship to the cost object. For indirect costs of a cost object, however, it must be determined how these costs will be split up since they are not directly tied to the cost object. Most of these methods include looking at the total indirect manufacturing cost pool and determining how much of the pool should go to each cost object.

Let’s look at an example.

Example

James is the CFO of a small business that manufactures switches. For his business, he is trying to allocate the indirect costs. The first step in this process is determining which costs are direct, and which are indirect. Identify which costs in the following list are considered indirect manufacturing costs.

  1. Direct labor
  2. Secretary’s salary
  3. Rent of the building
  4. Direct materials
  5. Electricity

Direct labor and direct materials are directly measured and charged to the cost object. This makes them easy to measure and control. However, the secretary’s salary, rent, and electricity do not increase directly with the cost object and are therefore indirect manufacturing costs.

Summary Definition

Define Indirect Manufacturing Costs: An indirect manufacturing cost means those expenses that do not increase directly as manufacturing production increases for a company that engages in manufacturing as their primary business activity.