INDIRECT COST CLASSIFICATION - Accounts and Finance for Managers

Among the classification of the overheads, the first and foremost is factory overheads. The factory overheads and work overheads are synonymously used. The factory overheads are nothing but the indirect costs incurred at the factory site. To find out the total factory cost or works cost incurred in the factory could be derived by adding the both direct cost and indirect cost incurred during the factory process.
Factory Cost =Prime cost + Factory overheads

Factory overheads are nothing but the indirect expenses incurred during the industrial process.

INDIRECT COST CLASSIFICATION

The next stage in the process of the unit costing is to find out the cost of the production. The cost of production is the combination of both the factory cost and administrative overheads.
Cost production = Factory cost + Administrative overheads

Administrative overheads is the indirect expenses incurred during the office administration for the smooth flow production of finished goods.

INDIRECT COST CLASSIFICATION

Immediate next stage to determine in the process of unit costing is the component of cost of sales. The cost of sales is the blend of both viz. Selling overheads and cost of production.

What ever the cost involved in the production process in the factory as well in the administrative proceedings are clubbed with the selling overheads to determine the cost of sales.
Cost of sales = Cost of production + Selling overheads

Selling overheads are nothing but the indirect expenses incurred by the firm at the moment of selling products. In brief, whatever the expenses in relevance with the selling and distribution are known as Selling overheads.

INDIRECT COST CLASSIFICATION

The last but most important stage in the unit costing is determining the selling price of the commodities. The selling price of the commodities is fixed by way of adding both the cost of sales and profit margin out of the product sales.
Sales = Cost of sales + Margin of Profit

Under the unit costing, the selling price of the product can be determined through the statement form.

The cost sheet or cost statement is as follows in the determination of the selling price of the product.

Illustration

Calculate the prime cost, factory cost, cost of production cost of sales and Profit form the following particulars:

production cost of sales and Profit

The Next stage in the preparation of the cost statement is to induct the stock of raw materials, work in progress and finished goods.


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