Indirect Costs

Indirect costs are those costs that are incurred in the factory but that cannot be directly associate with manufacture. Again these costs are classified according to the three elements of cost, materials labour and overheads.

  • indirect materials: some costs that we have included as direct materials would be included here, such as screws and glue: they are here providing they are immaterial in cost. Check carefully here what material means since some materials on the edge of being direct or indirect … know you product, process and materials. Other indirect material costs are said to include lubricants, cleaning materials.

  • indirect labour: labour costs of people who are only indirectly associated with manufacture: management of a department or area, supervisors, cleaners, maintenance and repair technicians

  • indirect expenses: the list in this section could be infinitely long if we were to try to include every possible indirect cost. Essentially, if a cost is a factory cost and it has not been included in any of the other sections, it has to be an indirect expense: there is no choice about this since this is all that there is left! Here are some examples include:

  • depreciation of equipment, machinery, vehicles, buildings

  • electricity, water, telephone, rent, Council Tax, insurance

Total indirect costs are collectively known as overheads.

Finally, within Product Costs, we have Conversion Costs: these are the costs incurred in the factory that are incurred in the conversion of materials into finished goods.