Indirect costs

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.

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 absorb 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.