Indirect costs associated with manufacturing orders

Direct costs are added directly within the manufacturing order or bill of materials when either is created. However, indirect costs must be added individually and assigned to a specific manufacturing order to be assigned exclusively to it or distributed across multiple manufacturing orders.

The indirect cost amount is added by creating a journal entry that documents the cost amount and its corresponding account in the chart of accounts.

This guide outlines the process of adding indirect costs and how to distribute them among manufacturing orders.

Indirect Cost Information and the Difference Between the Two Distribution Types

Click on “Indirect Costs” under the “Manufacturing” dropdown in the main menu, then click on the “Add Manufacturing Orders Indirect Costs” button.

Adding a New Indirect Cost

Enter the indirect cost 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.
- The difference between the two distribution types becomes apparent when assigning the cost to multiple manufacturing orders. However, if the indirect cost is assigned to a single manufacturing order, the full amount will appear as an indirect cost in the total cost report, regardless of the distribution type.
- If the distribution type “Based on Amount” is selected, this is what will happen:
  
  The system calculates the total cost of all manufacturing orders included in the indirect cost.
  
  then determines the cost percentage of each manufacturing order relative to the total cost of all these orders.
  
  Based on this percentage, the indirect cost is distributed among the manufacturing orders, with higher-cost orders receiving a larger portion of the indirect cost
- If the distribution type “Based on QTY” is selected, this is what will happen:
  
  The system calculates the percentage of the final product quantity for each manufacturing order relative to the total quantity of the final product across all these orders.
  
  Based on this percentage, the indirect cost is distributed among the manufacturing orders, with orders producing a larger quantity of the final product receiving a larger portion of the indirect cost.

The total cost for a manufacturing order is based on the total “Act. Cost” shown in the “Total Cost Report.” Therefore, if you want to include raw materials in the manufacturing order costs to ensure accurate distribution of indirect costs, make sure to receive the raw materials for the manufacturing order first.

For more information about the “Total Cost Report,” refer to this guide.

Adding the indirect cost journal entry

To define the indirect cost amount, you must first create a manual journal entry where you adjust the related debit and credit accounts and specify the entry amount. Then, you need to add this journal entry to the indirect cost. A single indirect cost may consist of one or more journal entries.

Click on “Add Entry” under the “Accounting” dropdown in the main menu, then adjust the journal entry accounts, enter the amount, and then click the “Save” button.

For more information on how to manually add a journal entry related to indirect costs, refer to this guide.

Go back to the indirect cost screen where the cost information was added, and select from the dropdown menu in the journal entry field the entry that represents this cost.

The dropdown menu displays the journal entries related to the account selected from the chart of accounts during the time period associated only with this indirect cost
You can click on the “+Add” button and set multiple journal entries to the indirect cost.

Allocate manufacturing orders for the indirect cost

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.

After completing the indirect cost information, click the “Save” button.

To clarify how indirect costs are allocated to the assigned manufacturing orders with a practical example, follow these steps:

In the following example, we have two manufacturing orders where we specified the type of overhead cost allocation as “Based on QTY.” The first manufacturing order involves producing 5 units of the final product, while the second manufacturing order involves producing 10 units of the final product. This means that the total quantity to be manufactured in both orders is 15.

Using the calculator, we find that the percentage of the first manufacturing order (5) relative to the total quantity of both orders (15) is (33.333%).

The amount of indirect cost (the entry) to be allocated to both orders is 1,000. When calculating the share for the first manufacturing order based on its percentage, which is 33.333%, we find the amount to be 333.333, as it automatically appears next to this manufacturing order in the “Indirect Cost” page.

Using the calculator, we find that the percentage of the second manufacturing order (10) relative to the total quantity of both orders (15) is (66.6667%).

The amount of indirect cost (the entry) to be allocated to both orders is 1,000. When calculating the share for the second manufacturing order based on its percentage, which is 66.6667%, we find the amount to be 666.666666, as it automatically appears next to this manufacturing order in the “Indirect Cost” page.

The same principle is applied when selecting the “Based on Amount” distribution type, replacing the quantity of the final product with the actual cost of the manufacturing order.

Bulk Addition of Manufacturing Orders

Instead of manually adding multiple manufacturing orders to allocate indirect costs, go to the Manufacturing Orders section within the Indirect Costs screen and click the “Bulk Add” button.

Enter the final product(s) for which manufacturing orders need to be added, select the “Date Range” that includes these orders, and then click the “Search” button.

The manufacturing orders associated with the final product will appear. Select the desired orders and click the “Add” button.

After clicking the “Add” button, all the manufacturing orders you added in bulk will appear, eliminating the need to add each one manually.

Displaying Indirect Cost in the Total Cost Report

The portion allocated to the manufacturing order appears in the “Total Cost Report” tab within the manufacturing order file. If you wish to view the indirect costs assigned to the manufacturing order, click on this tab in the manufacturing order file, where you will find it listed under the “Indirect Expense” section.