March 09, 2022/ Steven Bragg
Material cost is the cost of materials used to manufacture a product or provide a service. Excluded from the material cost is all indirect materials, such as cleaning supplies used in the production process. Follow these steps to determine the amount of material cost to assign to
a unit of production (such as a completed finished goods item): Ascertain the standard quantity of the material used to manufacture one unit. Add the standard amount of scrap associated with manufacturing one unit. Determine the standard amount of scrap associated with setting up the production run, and apportion it to the individual unit. If any scrap is then sold, apportion the revenue back to the individual
unit. For many materials, the cost of scrap and the revenue from the resale of scrap are so small that it is not worthwhile to apportion it to the material cost. If the material cost has been established as a standard, then you can subsequently calculate the material yield variance to see if actual materials usage was as expected, or you can calculate the purchase price variance to see if the purchase
price of the material was as expected. These variances are useful for investigating problems in the production and purchasing areas of a business. Material cost is also known as direct material cost and raw material cost. To facilitate preparation of an indirect cost proposal, shown below are (1) some definitions of the term "indirect costs," (2) a brief discussion of indirect cost rate structures and (3) a simple example of an indirect cost rate computation. Indirect Costs (definition extracted from FAR Part 31.2) An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to the several cost objectives. An indirect cost shall not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective. In simpler terms, indirect costs are those costs not readily identified with a specific project or organizational activity but incurred for the joint benefit of both projects and other activities. Indirect costs are usually grouped into common pools and charged to benefiting objectives through an allocation process/indirect cost rate. An indirect cost rate is simply a device for determining fairly and expeditiously the proportion of general (non-direct) expenses that each project will bear. It is the ratio between the total indirect costs of an applicant and some equitable direct cost base.
Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs). Commercial (for-profit) organizations usually treat "fringe benefits" as indirect costs. These fringe benefits are applied to direct salaries charged to projects either through a fringe benefit rate or as part of an overhead/indirect cost rate. Therefore, fringe benefits treated as indirect costs should not be included as a direct cost in the "Personnel" category of the budget form of the grant application or on a contract proposal. The indirect cost base or bases (that is, the denominator(s) of the fraction producing a rate) should be selected so as to permit an equitable distribution of indirect costs to the benefiting cost objectives. Generally, indirect cost rate structures for commercial organizations follow a single, two-rate (for example, fringe and overhead rates), or three-rate (for example, fringe, overhead, and General and Administrative expense rates) system. A single rate structure is illustrated below. Indirect Cost Pool
* Includes costs associated with independent (self-sponsored) research and development (IR&D) activities. Last modified on 2020-12-13
What are indirect costs in manufacturing?What are Indirect Manufacturing Costs? Indirect manufacturing costs are production costs that cannot be directly associated with a produced unit. Examples of these costs are supplies, depreciation, utilities, production supervisory wages, and machine maintenance.
What are indirect costs called?Indirect Cost Rate. Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).
What is the cost of manufacturing called?Reading Time: 4 minutes. Manufacturing overhead (MOH) cost is the sum of all the indirect costs which are incurred while manufacturing a product. It is added to the cost of the final product along with the direct material and direct labor costs.
Are also called indirect production cost?Indirect manufacturing costs are a manufacturer's production costs other than direct materials and direct labor. Indirect manufacturing costs are also referred to as manufacturing overhead, factory overhead, factory burden, or burden.
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What term is used to refer to the cost that are indirectly associated with the manufacture of the finished product?
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