Fixed and variable costs can now be broken down into two more cost types: direct and indirect costs. These classify the costs of parts being manufactured and are critical to calculating shop overhead rates. Direct costs are those costs that are directly associated with the production of the product. Indirect costs are those costs which do not associate directly with the product being manufactured and cannot be determined for specific products.
Direct costs are attributed directly to the manufacturing of the product. For example, if a product is manufactured out of metal, the metal of the product are direct costs. The material used in the product being manufactured is specific for the given product and not shared among other products. Examples would include all bill of material used to make the product including items such as metal, wood, plastic, nuts, bolts, screws, paint, etc. Direct costs not only include the bill of material but also includes the direct labor of the craftsman making the product. The direct labor costs and bill of material can be attributed directly to the manufacturing of the product.
Indirect costs, on the other hand, cannot be directly attributed to the manufacturing of the specific product. Examples of indirect costs are rent, electricity, office space. Employee’s not directly working on the manufacturing of products is also considered indirect because those employees are not specifically involved with the production of the specific product.
In order to acquire a good estimate both direct and indirect costs should be added to the cost of producing and manufacturing the product.
MIE Solutions provides software resources to help you manage your direct and indirect costs throughout the product lifecycle from quoting and estimating, job costing to invoicing.