Direct and Indirect Costs

Fixed and Variable costs can now be broken down into two more cost types.  Direct and Indirect costs 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 with 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 manufacturing of products is also considered indirect because those employee’s 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 into 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.

http://mie-solutions.com/mie/index.php/MIE-QuoteIt-Quoting-and-Estimating-Software/mie-quoteit.html

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Author: MIE Solutions

David Ferguson has over 20 years of experience in the manufacturing and fabrication industry. David Ferguson has been to over 100 manufacturing companies helping and guiding them to be more efficient and cost effective. As a child in Junior High School David Ferguson found a passion for the early computer systems, which would drive much of his future work. David Ferguson created and sold his first computer program, Arrow Data Systems, which was an early CAD/CAM system for the Apple 2e Computer. In the late 1980's after seeing his father (a sheet metal manufacturer) come home many nights estimating, David Ferguson saw an opportunity to optimize his effort through computer technology. Shortly thereafter the FabriTRAK Production Control package was developed. The Quote It! estimating package was developed out of the FabriTRAK system to become one of the leading sheet metal estimating packages in the world. David Ferguson has always had a passion for developing software to make the manufacturing process simpler, faster and more efficient. Prior to founding MIE Solutions David Ferguson worked with his father at Alco Sheet Metal, METALSOFT Inc. and was a consultant at Toyota Motors Sales. David Ferguson has his Masters in Computer Science and Mathematics from California State University, Long Beach.

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