Indirect costs for specific items and manufacturing operations

Indirect costs are the set of manufacturing costs involved in the transformation of products that are not fully identified or quantified with the development of specific items of products, production processes or specific cost centers. Examples of general manufacturing costs are: supplies, utilities, property tax, insurance, depreciation, maintenance and all those costs related to the manufacturing operation.

The indirect cost category contains a wide variety of items. Many inputs are required in addition to direct labor and direct materials to produce products. Examples include depreciation of buildings and equipment, maintenance, supplies, supervision, materials handling, energy, property taxes, care of factory grounds, and plant security.

Supplies are generally those materials required for production and which do not become a part of a finished product or are not used for the provision of a service, direct materials that form an insignificant part of a final product are generally included within the indirect cost category as a special type of indirect material.

The cost of direct labor overtime is also generally allocated as an indirect cost. The rationale is that typically no particular production run can be identified as the cause of the overtime. Accordingly, the cost of overtime is common to all production runs and is therefore an indirect manufacturing cost.

Production costs constitute the value of the inputs required by economic units to produce goods and services; considered here are the payments to the factors of production: to capital, made up of payments to the entrepreneur (interest, profits, etc.), to labor, payments of wages, salaries and benefits to workers and employees, as well as the goods and services consumed in the production process (raw materials, fuels, electricity, services, etc.), and the costs of the production process (raw materials, fuels, electricity, services, etc.).