Acc Assigment – Indirect Costs
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Indirect costs on the other hand are costs related to the production of whatever you sell, but are not easily allocated per piece. Lets look at our product hamburger . We understand what goes into each hamburger, the cost of fuel for our gas grill is about “????”, and the lighting for the kitchen is about”????”. We need these to produce hamburgers. We could try to average out the cost of fuel and lighting and divide it by the number of hamburgers sold, but what if we sell zero hamburgers tomorrow? Our lighting and fuel costs are not going to be zero. We cant accurately predict these costs based on how many hamburgers we sell. We also know that if we stopped selling hamburgers, we could stop paying these costs. Costs related to production, or to providing a service, that cannot easily be measured per order are known as indirect costs.
So lets go back to our example one more time and look at the cost of labor. In our original example we said that the labor time associated with making one burger was a direct cost. Well what if our hamburger store only has 3 employees? Are we only going to pay the cook for 5 minutes if we only sell one burger between 2:00 and 3:00 pm? Not likely. So in this case it would make more sense to say the cooks salary is really an indirect cost, not a direct cost. Its related to production, but we still need to pay him even if sales are slow.
Now imagine you supply all the hamburgers for a football stadium. Whenever theres a professional football game you need 100 cooks. Whenever theres a high school game you need 20 cooks. Now the number of cooks is related directly to the number of burgers you will sell, and you only need to pay as many of them on any given day as you will need to provide the burgers. This sounds like a direct cost again. The fact is that different businesses categorize different things as direct or indirect costs depending on their size and how they like to manage things.
The thing to remember is this. Over all, variable costs are the costs that go up or down depending on how many orders you are trying to fulfill. The direct cost portion are things directly related to how many orders you take, and the cost goes up or down immediately depending on the number of orders you have. Indirect costs are things that contribute to overall production, but are hard to assign to each order or small group of orders. Indirect costs can be managed up or down depending on how many orders you have, but it doesnt necessarily happen automatically.
FACTORY OVERHEADS
Indirect materials
Oils , wrapper,
Indirect labour
Salary of supervisors, storekeepers wages, security costs
Indirect expenses
heating, lighting, insurance,