Tag Archives | indirect cost

Indirect Materials

See Also:
Indirect Labor
Audit Committee
Managed Sales And Use Tax Audit Programs
Mining the Balance Sheet for Working Capital
Inventory to Working Capital

Indirect Materials Definition

In accounting, the indirect materials definition is a category of indirect cost. Indirect materials are materials used in a production process, but they are not directly traceable to a cost object. Consider these costs as overhead costs. Then treat them accordingly.

Download the free Know Your Economics guide to monitor what’s happening in your business. 

Indirect Materials Example

It is not always easy to distinguish between direct and indirect materials. Some materials may be used in the production process or in the services provided; however, you would still consider them indirect because they are not monetarily significant or not conveniently traceable. Let’s look at an indirect materials example…

For example, spices added to a hot sauce during the production of the sauce. The spices are necessary for the recipe, but they are not easily traceable. Instead, consider those spices indirect materials and treat them as such.

Another simple example of this could be office supplies at a service company. In order to provide the service, you may need to have office supplies, such as pens, paper, and staplers. But these costs are not substantial enough and not directly traceable to the service provided. So they are treated as indirect material costs and part of overhead.

Conclusion

Treat indirect materials, like other indirect costs, as overhead. Either expense them in the period in which they are incurred, or allocate them to a cost object via a predetermined overhead rate. Want to check if your unit economics are sound?  Download your free guide here.

Indirect Materials, Indirect Materials Definition, Indirect Materials Example

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs


Indirect Materials, Indirect Materials Definition, Indirect Materials Example

Share this:
5

Indirect Labor

See Also:
Indirect Materials
Accounts Payable
Audit Committee
Managed Sales And Use Tax Audit Programs
Carried Interests

Indirect Labor Definition

In accounting, indirect labor is a category of indirect cost. It refers to labor costs incurred during a service or production process, but are not directly traceable to a cost object. Consider them overhead costs and treat them accordingly.

Indirect Labor Example

It is not always easy to distinguish between direct and indirect labor costs. Some labor costs may be incurred during the production process or while providing services, but still may be considered indirect because they are not readily applicable or not conveniently traceable.

Examples of indirect labor costs include, for example, the cost of an employee overseeing machines in an automated production process. The employee must oversee the machinery and equipment in the production process, but because the employee is not actually engaged in the production process the relevant labor costs are considered indirect labor costs and treated as such.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Another example of indirect labor costs is overtime. Sometimes it is appropriate to consider overtime wages direct labor and sometimes it is appropriate to consider overtime indirect labor.

When overtime wages are incurred by chance – it just so happens the employee working on the production process is working overtime – as opposed to by necessity – the job was a rush-job or a particularly strenuous job that required extra work – then the overtime wages may be considered overhead and treated accordingly.

Treatment

Treat indirect labor costs, like other indirect costs, as overhead and either expensed in the period in which they are incurred, or allocated to a cost object via a predetermined overhead rate.

Download the free Pricing For Profit Inspection Guide. This ultimate guide allows you to easily discover whether you have a pricing problem and gives you steps to fix it.

indirect labor

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab.The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

indirect labor

 

Share this:
0

Direct Cost vs Indirect Cost

See Also:
Direct Labor
Direct Materials
Cost Driver
Direct Labor Variance Formulas

Direct Cost vs Indirect Cost

In accounting, there is a distinction between direct cost vs indirect cost. You can trace direct costs to a particular cost object. However, you cannot trace indirect costs to a particular cost object. A cost object is something that can incur cost. For example, a cost object could be a company division, a product line, a unit of inventory, or even a decision.

The idea is to analyze business decisions by determining the incremental costs that would result from that decision. If a decision affecting a certain cost object determines whether the cost is incurred, then it is a direct cost. If the cost is incurred regardless of the outcome of the decision at hand, it is an indirect cost.

Examples of Direct and Indirect Costs

Examples of direct costs includes the following:

Whereas some examples of indirect costs include the following:

  • The rent and the utility expenses incurred by an office building that houses several different business areas of a company
  • The salary of a manager that supervises more than one factory

Indirect Costs Become Direct Costs

A cost can be an indirect cost in regard to one cost object and a direct cost in regard to another object. For example, consider the salary of the manager who supervises multiple plants an indirect cost for any one of those plants. But, also consider the manager’s salary a direct cost for the division encompassing all of those plants.

There are 9 things that you need to look at in your financial statements. Click here to learn what they are.

direct cost vs indirect cost

direct cost vs indirect cost

 

Share this:
0

LEARN THE ART OF THE CFO