Under traditional cost accounting, the indirect manufacturing costs are allocated (or spread) to the products manufactured based on direct labor hours, direct labor costs, or production machine hours. However, in recent decades the indirect manufacturing costs have increased significantly and are less likely to be caused by the quantity of direct labor or production machine hours. (This may not be a problem for financial reporting if the amount of inventory is consistently small, but it can be a problem for pricing and other decisions.)
Examples of indirect manufacturing costs include:
- depreciation, repairs and maintenance, electricity, etc. for the production facilities and equipment
- salaries, wages and fringe benefits of the indirect manufacturing personnel such as production supervisors, material handlers, quality assurance, and other factory support personnel
- factory supplies, outside services pertaining to manufacturing, and other manufacturing related costs.