Trending September 2023 # How To Calculate Indirect Costs # Suggested October 2023 # Top 14 Popular | Speedmintonvn.com

# Trending September 2023 # How To Calculate Indirect Costs # Suggested October 2023 # Top 14 Popular

You are reading the article How To Calculate Indirect Costs updated in September 2023 on the website Speedmintonvn.com. We hope that the information we have shared is helpful to you. If you find the content interesting and meaningful, please share it with your friends and continue to follow and support us for the latest updates. Suggested October 2023 How To Calculate Indirect Costs

Definition of Indirect Costs

Start Your Free Investment Banking Course

How to Calculate Indirect Costs?

The indirect cost for any company can be computed by using the following three simple steps:

Step 1: Firstly, it is to determine which input costs are indirect by nature for manufacturing a product or service delivery. Next, combine all these costs to arrive at the total manufacturing overhead.

Step 2: Next, calculate all the administrative and general costs that can’t be directly allocated to manufacturing the product or service delivery. Add all these costs together to arrive at the total administrative overhead.

Step 3: Finally, add together the total manufacturing overhead and administrative overhead that will eventually give the total indirect cost of the production.

Example

Given below is the example mentioned:

Let us consider a factory named XYZ Ltd that has the following information, and from the below-furnished information, the total indirect cost of production has to be calculated.

Raw material cost: \$300,000

Labor wages: \$150,000

Depreciation – \$5,000

Repairs and maintenance – \$50,000

Office electricity expense – \$10,000

Salaries – \$100,000

Factory supplies – \$3,000

Accounting expense – \$10,000

Audit expense – \$5,000

Legal expense – \$3,000

Total Indirect Manufacturing Overhead = Depreciation + Repairs and Maintenance + Office Electricity Expense + Salaries + Factory supplies

Total Indirect Manufacturing Overhead = \$5,000 + \$50,000 + \$10,000 + \$100,000 + \$3,000

Total Indirect Manufacturing Overhead = \$168,000

A few of the abovementioned expenses are not included in the Total cost calculation because they are direct costs. Those excluded costs in the above cases comprise raw material costs and labor wages.

Finally, the Total Indirect Cost can be calculated as below,

Total Indirect Cost = \$168,000 + \$18,000

Total Indirect Cost = \$186,000

Relevance and Uses of Indirect Costs

It can help companies to make significant pricing decisions. Usually, an accountant will add all the overhead costs and then allocate them based on the per-unit cost to compute the company’s overhead per product. This eventually helps a company ensure they are still making a profit on each unit, even after incorporating all the overhead costs.

Ultimately, this becomes the foundation for the product pricing strategy before setting the desired profit margin. In the case of manufacturing companies, indirect material costs include items utilized for the production of the end product, which again is not part of the finished goods inventory. Such items can be glue, plastic wraps, staples, and tapes needed in production. Even though indirect material costs may vary widely depending on the nature of operations, it is crucial to include them when calculating overhead costs. Senior management should know the actual production cost, considering all input costs necessary in the manufacturing process. Otherwise, the financial reporting and the subsequent analysis may be inaccurate.

Recommended Articles

This has been a guide to Indirect Costs. Here we discussed the concept with examples, relevance, and uses. You may also look at the following articles to learn more –

You're reading How To Calculate Indirect Costs

Update the detailed information about How To Calculate Indirect Costs on the Speedmintonvn.com website. We hope the article's content will meet your needs, and we will regularly update the information to provide you with the fastest and most accurate information. Have a great day!