Indirect manufacturing costs

Indirect manufacturing costs are those that come from activities that are not directly involved in the production or manufacturing chain.

Indirect manufacturing costs

In other words, they are costs that, although they cannot be passed on or measured in a proportional way to the final product, they are also necessary for the proper functioning of the company, however they are not essential.

What are they for

Identifying and analyzing the costs involved in the manufacture of a product is essential to be able to make decisions and define strategies. In this way, if we realize that a cost is high compared to the impact it generates, it will be possible to decide whether to make an adjustment or eliminate it.

This matter of analysis and decisions is studied and brought together by the so-called cost or management accounting. The main mission of both is to find out where each cost of the company originates and where in the production chain its effect could be attributed. Thus, we can better understand the needs of the company and adopt measures to be more efficient in economic terms.

Types of manufacturing overhead

Within the indirect manufacturing costs there are three classes:

  • Variables They are those that vary in value depending on the volume of manufacture, that is, the higher the volume of manufacture, the greater the amount.
  • Fixed. No matter the volume of production, they are costs that will be generated constantly without the greater or lesser evolution in manufacturing affecting the figure of these costs.
  • Mixed . When we find costs that we cannot classify as variables because they have a fixed component and vice versa, we can classify them as mixed costs.

If the direct manufacturing costs are generally made up of labor and direct raw materials used in the production process, we can therefore affirm that in general terms the rest of the costs are indirect.

Examples of Indirect Manufacturing Costs

Classify costs as direct or indirect and indicate the class of indirect costs, given a company that has the following costs:

Indirect manufacturing costs

It should be noted that each company has a different cost structure. This divergence is even more accentuated when they are businesses from different sectors. For example, if in one company supplies can be a variable cost, in another they can be fixed.

With regard to taxes, there are taxes that go in proportion to the price of the product sold and others that simply go by sections, or are conditioned by hybrid factors between the variable and the fixed. Examples are VAT, IS or personal income tax.