Indirect factory costs definition
/What are Indirect Factory Costs?
Indirect factory costs refer to all manufacturing expenses that cannot be directly traced to a specific product, but which are necessary for the production process. These costs are classified under manufacturing overhead and are included in the total cost of production, impacting the final product price and profitability. Proper allocation of indirect factory costs ensures accurate product costing and financial reporting.
Accounting for Indirect Factory Costs
Unlike direct materials and direct labor, which can be directly assigned to each unit produced, indirect factory costs are allocated across all units manufactured during the same period using a predetermined method, such as machine hours, labor hours, or a percentage of direct costs. If the units are not sold, then the allocated costs are included in ending inventory. If the units are sold, then the associated cost allocation is charged to the cost of goods sold.
Examples of Indirect Factory Costs
There are multiple examples of indirect factory costs, including the following:
Factory related costs. This includes the depreciation on factory equipment and the production building, the cost of the utilities incurred by the production operation, and the cost of equipment repairs and maintenance.
Compensation. This includes the wages earned by production supervisors, quality assurance personnel, and the materials management staff.
Other production costs. This includes the cost of production supplies, as well as any costs incurred for services provided by outside parties.
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Terms Similar to Indirect Factory Costs
Indirect factory costs are also called indirect manufacturing costs and factory overhead.