Indirect costs

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Posted on by lally

Hi All ,

When it comes to production process to load the indirect costs , we have the two options as mentioned below in costing sheet.

* Fixed – A cost that does not change with the production throughput
* Variable – A cost that does change with the production throughput

Could i know the example of the variable option , how the indirect cost will be vairable per production order . Any real world

Any real world exmaples of highly appriciated ?

Thanks in advance.

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Brandon Wiese 17,788 on at

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Variable is by far the more common scenario, i.e. labor and overhead that vary directly with the quantity produced. The rate is constant, but the cost varies with the production posting.

Fixed is less common, i.e a constant charge or cost that is independent of the quantity produced.

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lally 8 on at

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Thanks for the reply ,

Sorry , i am not clear about these two options.

Could you please explain with some real world examples ?

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Ludwig Reinhard Microsoft Employee on at

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Hi lally,

From an accounting & finance perspective indirect costs are always fixed costs.

I don't know a real world example where indirect production costs would vary with the quantity produced.

Please note that an available setup option does not automatically result in useful real life setups that should generally be used.

Best regards,

Ludwig

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Weaveriski 23,620 Moderator on at

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So as a fixed indirect cost the companies cost accountant may add $1 for each item produced to cover the cost of the building the product is being made in.

In essence it is a cost that you cannot eaily attribute to the cost of the physical item being made and it truly depends upon the accounting approach of the business. You can cover machine maintenance from a generic perspective where all items pass, or the cost of maintaining your warehouse (storage costs). Plant and machine depreciation is another element.

On the indirects that are variable you can argue a cost like electricity is, however most treat it as an estimated cost and abdorb as a fixed indirect in my experience. So think of the variable as a cost to the business that is known and is indirect to a specific product, but you can roughly absorb it in relation to production output. Most however would then see anything related to output as a variable cost that is direct and should be included in the BOM costings.

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