Indirect manufacturing costs definition
/What are Indirect Manufacturing Costs?
Indirect manufacturing costs are production costs that cannot be directly associated with a produced unit. Under financial reporting, indirect manufacturing costs are aggregated into an overhead cost pool and allocated to the number of units produced in a reporting period; doing so results in some capitalization of these costs into the inventory asset.
Examples of Indirect Manufacturing Costs
Examples of indirect manufacturing costs are as follows:
Facility related. Includes the costs of equipment and facility depreciation, utilities, and repairs on the production equipment and factory building.
Compensation related. Includes the costs of the wages and fringe benefits of all manufacturing support staff, including supervisors, quality assurance personnel, and materials management staff.
Other indirect costs. Includes the costs of production supplies and outside support services.
Terms Similar to Indirect Manufacturing Costs
Indirect manufacturing costs are also known as factory overhead and manufacturing overhead.
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Example of Indirect Manufacturing Costs
Precision Auto Parts manufactures engine components. While direct costs like raw materials (metal and plastic) and direct labor (assembly line workers) are easily traceable to each unit, the company also incurs indirect manufacturing costs that support production but cannot be directly assigned to individual products. These indirect costs are as follows:
Factory Rent & Utilities:
The company pays $50,000 per month for the factory space, which houses multiple production lines.
Electricity and water bills for operating machinery, lighting, and climate control add another $10,000 per month.
These costs are necessary for production but cannot be directly linked to a single unit.
Depreciation on Machinery & Equipment:
The company uses automated CNC machines for precision cutting, which cost $500,000 and depreciate over 10 years.
The monthly depreciation expense of $5,000 is an indirect cost because the machines are used for multiple products.
Factory Supervisor Salaries:
The company employs supervisors who oversee production across different product lines.
Their combined salaries total $15,000 per month, but since they manage all production activities, their wages cannot be assigned to specific units.
Manufacturing Supplies & Maintenance Costs:
The company purchases lubricants, cleaning materials, and small tools ($2,000 per month) to keep the machines running.
Regular maintenance and repairs on factory equipment cost around $7,000 per quarter.
These costs indirectly support production but are not tied to any specific product.
All of these expenses—rent, utilities, depreciation, supervisor salaries, and factory maintenance—are considered indirect manufacturing costs, because they are essential to production but cannot be directly traced to individual engine components. Instead, these costs are allocated to products using an overhead rate, often based on direct labor hours or machine usage.