What are indirect manufacturing costs?

Definition of Indirect Manufacturing Costs

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.

US GAAP requires that indirect manufacturing costs be allocated to, assigned to, or absorbed by the manufacturer's output (in addition to the cost of direct materials and direct labor) for its external financial statements. This is known as absorption costing and must be used in determining a manufacturer's cost of goods sold and the cost of its inventory.

In traditional cost accounting, the indirect manufacturing costs are allocated 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 when the amount of inventory is consistently small, but it can be a problem for pricing and other decisions.)

Examples of Indirect Manufacturing Costs

Some examples of indirect manufacturing costs include:

  • depreciation, repairs and maintenance, electricity, etc. for the production facilities and the production 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