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Indirect cost traceability

Category: Budgeting Methodology

The indirect cost which a company has to spend to keep it’s operations going are no predetermined fatality and no legacy from the past. The expense of each indirect cost item should be justified through the indirect function it has been spent for. The indirect cost planning system

  • (a) should provide for visibility as to how types of cost (e.g. employee salaries) spent for an assisting function (e.g. mechanical repairs) serve the production activities.
  • (b) should, if changes occur in the productive activity (e.g. productive activity 1 increases or decreases), be able to at least approximately determine the impact on the assisting functions, and on the individual cost categories (e.g. what is the impact on the mechanical repair function and on the headcount in this function, if productive activity 1 increases, or decreases by 10%).
  • (c) should clearly indicate what contribution an individual product (symbolized in the example as output from an activity) makes to recoup the cost of the assisting functions.

Due to confidentiality reasons, the Excel indirect manufacturing cost budgeting for the two sample companies does not reproduce the full detail of the manufacturing overhead planning process, but only the resulting summary sheets.

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