Adding Indirect Costs

What are Indirect Costs?

The primary difference between direct and indirect costs is that direct costs are directly linked to the manufacturing process of a product that generates profits, while indirect costs are not directly tied to the main operations that generate income for the company. Some costs related to the main operational activities are considered indirect costs if you cannot track the exact cost and allocate it to specific units of production.

For example, you cannot determine the exact amount of electricity used to produce a desk or a chair. In this case, the cost is classified as an indirect cost. In Daftra, indirect costs are added independently and allocated to manufacturing orders that consume this cost.

 

2. How to Add an Indirect Cost?

1. Click on “Manufacturing” from the main menu.
2. Click on “Indirect Costs.”
3. Click on the “Add Indirect Cost” button.
4. Enter the indirect cost details.
   • Indirect Costs Information
     • Account: Select the account from the chart of accounts that you want to associate with the indirect cost.
       • You can modify the chart of accounts and add a new account specific to this indirect cost, such as an electricity expense account. For more information on how to add a new account, refer to this guide.
     • Start Date: Specify the start date for the transactions related to the indirect cost.
     • End Date: Specify the end date for the transactions related to the indirect cost.
     • Distribution Type: Choose how to allocate the indirect cost to the manufacturing orders, either by quantity or cost.
       • If you choose to allocate the cost by quantity, the indirect cost will be evenly distributed across the manufacturing orders assigned to this cost.
       • If you choose to allocate by amount, the indirect cost will be distributed as a percentage, so the higher the cost of a manufacturing order, the greater the share of the indirect cost it will bear.

   • Journal Entries

     • Entry: Select the journal entry associated with the indirect cost transactions.
       • You can click the “+Add” button to assign multiple journal entries for the indirect cost.
       • The dropdown list will show the journal entries related to the account you selected from the chart of accounts for the time period related to the indirect cost transactions.
       • For more information on adding journal entries manually, refer to this guide.

Manufacturing Orders

1. • • Manufacturing Order: Choose the manufacturing order to which you want to allocate the indirect cost.
       • You can click “+Add” if you want to distribute the indirect cost across multiple manufacturing orders.
       • If you allocate the indirect cost to one manufacturing order, the full amount of the entry (expense) will be added to that order. If you allocate the cost to multiple orders, you’ll need to choose the distribution type to adjust the proportion of the expense allocated to each order.
2. Click on “Save“.