How to determine and share out indirect costs for each activity?

I prefer to leave answers to Experts. Thanks for Your kind Invitation.

This is a dangerous excercise because it can lead to wrong decisions. 

For example, imagine a company with six departments and a CEO who is very expensive.  Somebody could divide the CEO's salary by six and allocate 1/6 to each department.  So far, so meaningless. 

When the next cost cutting exercise comes along, each department will be asked to make a cut of 10% ... which is effectively asking them to cut the CEO's salary by 10%, which they don't have the power to do.  Moreover, the smallest department will be disproportionately affected, because their 'share' of the CEO's salary will be a bigger proportion of their total costs.  Therefore the cost cutting exercise will be less effective and have a greater impact on output than it would otherwise have done.

Calculating indirect cost The following is the formula for calculating indirect cost rate, also known as composite rate, per the operating agreement. the indirect cost rate equals indirect costs divided by revenues. Allocated cost centers Allocated costs centers are used in determining ALA’s total indirect costs and include both direct and indirect costs that are generated in a given area ie operating supplies, telephone, audit/bank fees do not incur indirect costs – direct costs only. They are units or activities used to determine indirect costs and include the following (*Denotes units or areas that incur both direct and indirect costs): Distribution Center* Building Operations* Human Resources Library/ORS* Production Services (net chargebacks)* Reprographics (net chargebacks)* Membership Services* Operating Supplies (net chargebacks) Equipment Repairs and Maintenance/Lease Telephone Expense (net chargebacks) Public Information Office* Information Technology & Telecommunication Services* Financial Services* Audit and Bank Fees Member Programs and Services* General and Administrative (Council/Administration, Executive Board, Executive Office, Communications AED, Office Services/Purchasing, and Business Expense)

Keep record of all such activities in miscellanous.

As indirect cost effects your direct cost, but its not neccessary that it will be appearing for the whole year.

It happen, seldom and some time if it happen on regular basis, but changes its shape and structure, you can't maintain an individual seperate account for that, we put it in a miscellanous expense effecting direct to cost.

I fully agree & endorse both mr.Vaiyapuri & mr. Duncan's wonderful & constructive submissions. 

Thanx for the invitation

thanks for the invitation

Steps load industrial indirect costs on the production units.

Industrial indirect cost accountant faces production units extremely difficult because of the lack of a direct relationship between the industrialized and indirect costs of the system and production units, but the download these indirect costs on the product units is subject to scientific principles of the following:

1. The principle of loading:

It means the need to download the product share of industrial indirect costs on the grounds that these costs are required to complete the production as it contributes indirectly in the production process.

2. The principle advantage:

This means that the load product units share of indirect cost elements should be as much benefit from the services of this item.

3. The principle of approaching direct: It is well known that whenever a direct cost component whenever loaded on production units easy and fair and therefore costs Anasrmn analysis accountant trying indirect cost elements so that determines the field that is affected by the occurrence of the element, in particular, and directly, rather than regarded as a special element the whole factory.

4. The principle of capacity to pay and download burdens: This special principle supports the distribution of indirect costs on the principle of a tax known is based on the distinction between the entry of individuals and enterprises as it carries Alaboualcbr from the tax to owners of large incomes and thus in the project is to distinguish between the burden for departments or sections or production units on the basis of their ability to withstand greater or lesser overheads share and so it is the link between the elements of indirect expenses and income derived from each branch of activity, but despite the ease of transmission can not be considered the principle of fair and what consequent use in the costs of punishing efficient and load lucrative units part of the the burden of loss-making units.

5. principle that the cost of each cost center element: This means that the direct cost of each element or indirectly, should be allocated or distributed benefiting from the services of this component cost centers, whether the centers beneficiary production or marketing or administrative.

-khtoat Load industrial indirect costs:

The application of the theory of cost centers in Thmpel industrial indirect costs on the production units requires the following steps:

First, determine the cost centers:

Is split into a production center that actually pass the production units and service centers, but a productivity that produces public services and crisis assistance in the productive activity.

And it is linked to elements of industrial authorship of direct and indirect wages and indirect expenses such centers in preparation for uploading to the production units.

Second: Survey, industrial direct cost elements Pollack:

Industrial indirect costs occurring during the financial year and therefore does not need to wait until the end of the financial year to know so it was a cost accountant that specifies the industrial indirect costs in advance on a discretionary basis and work to load modules activity share of this discretionary .vabannsph elements to industrial costs fixed direct, such as depreciation and rent it easily appreciated greatly as they do not change from year to year and then can rely on extracted from the records of the previous years data. The Industrial Variable indirect costs, the appreciation needs to be something of accuracy where it is constant from year to year but changed with the change of production volumes.

Third: the allocation and distribution of industrial indirect costs to cost centers:

Intended process customization download some indirect cost elements to cost centers that are unique and that caused the emergence of allocated cost elements and is done for the elements of industrial indirect costs per unit of product, which are directly of the Center for a certain cost. Some elements of indirect industrial costs occur arising from the existence center the cost of a particular activity or to practice it and, therefore, is directly to the center and Maajb customize those elements of this center therefore be industrial costs unallocated indirect costs is the direct cost of any that stick directly centers.

It is intended process of direct industrial cost allocation allocation ratios of indirect cost elements to cost centers on the basis enables the distribution of elements in accordance with fair for the portions and thus industrial costs undistributed direct are the indirect costs on any cost centers that do not stick to them directly.

Fourth: the distribution of the costs of production services centers on the production centers:

This step is in indirect costs related to the industrial centers of production services on the production and distribution centers because of production services centers established to service production centers must be affordable to the production centers.

There are several ways for the distribution of productive service centers on the production centers. These are different ways depending on the nature of the economic units and the size of the production costs and these methods are:

1 - way total distribution:

This method based on the distribution of the total indirect costs for the industrial centers of production services in the economic unit once production centers only, using a suitable direct or hours machines rotation or direct labor hours worked basis.

This method is characterized by undemanding and they are suitable for small projects with a typical production where few services and cost centers be minimal.

But shame on this method is as follows:

- The use of a consolidated basis for the distribution of the costs of service centers total production centers ignores the nature of individual services each center service alone nature center maintenance service is different from the nature of affairs service center services workers, for example, which requires the need to distribute each center incommunicado service production centers.

- Concerned with the distribution of the costs of services centers on the production centers only and thus ignore the potential benefit other service centers which requires the need to distribute the costs of each service center on each of the production centers and other service centers, according to the relative importance of top-down to take advantage of all the services the center alone

- Mutual services between ignoring the same service centers with each other by mutually benefit each other.

2 - solitary method of distribution:

According to this method is the distribution of the costs of each service center separately solo on production centers only to the extent they benefit from the service center services that are selected distribution basis depending on the nature of service performed by the service center.

The advantage of this method is that it dealt with the first flaw in the overall method of distribution of the costs of service centers and so doing distribution of the costs of each service center solo on production centers, according to the basis of the distribution which is commensurate with the nature of each center services separately but maligned It did not address the second and third flaw in the way overall.

3 - Countdown distribution method:

According to this method is the distribution of the costs of each service center on each of the production centers and other service centers in accordance with the relative importance downward to take advantage of all the service center service on the unit, so this method requires that the descending order are the order of service centers productivity according to their relative importance so that it starts first distribution costs more importantly, the service center, which performs services for the largest possible number of service centers and production centers and so ends the distribution of the service center, which Yudi services to the less number of centers, the costs of any production centers only where the distribution of the service center costs are relatively the most important first, and then the next and ends with the distribution of the latter service center costs production centers only.

But what are the service centers that are distributed first and taken into account in this regard that the priorities are in descending order as follows:

- Distribution service centers, which permeated his services to the largest number of production and service centers with a rate that will benefit him the center of each of its services.

- After the above re-center the following distribution costs in descending order, who benefit from the services the largest number of centers.

It should be noted that the cost of each service center is not required to be distributed to all centers that follow in the standings, but only beneficiary.

It is noted that this method may cure defects and criticized the previous methods and it took into account the possibility of benefiting Services Center Services Center else but from only one party that is, they overlooked the idea of ​​sharing services (mutual services) between the service centers themselves, and this method is widespread in large-scale industrial projects.

4 - interactive method of distribution:

This method takes into account the idea of ​​mutual services between productivity service centers Under this method is added to the cost of each service center cost of any services learned from other services center and poses the same reciprocal of the cost of the center who reported mutually service centers are then distribute the net cost of each service center after adding the cost put the cost of mutual services production centers and services using the method or unilateral downward.

Fifth, determine the rates of industrial load indirect costs in the production centers:

Intended to download industrial indirect costs in the production centers to determine the share of unit product of industrial indirect costs in every production center separately using the appropriate loading rates of the nature of productive activity or operating within each production center alone.

It is noted that there may be a loading rate of one in the case of a single production center facility and there may be multiple download rates in the case of multiple production industrial facility centers and preferably a loading rate of the user upload rate diachronic such as direct labor hours and hours automation because the indirect costs of time costs.

And is determined loading rates for the costs of industrial indirect production centers after after the completion of the distribution of indirect industrial costs related centers services is the most important foundations of the process to determine the rates of load industrial indirect costs in the production centers in preparation for determining the share or the cost of unit product of these indirect industrial costs the following grounds:

1 - The number of product units

2 - the cost of direct materials

3 - direct wage cost

4 - Cost of direct primary

5 - hours of direct action

6 - automation hours

Sixth: measuring industrial indirect cost differences:

There are two ways to download industrial indirect costs of production, namely:

1 - Download the estimated rate method:

According to this method is Survey, industrial indirect costs estimated necessary for productive activity in production and productivity centers, service centers during the period is also determined by the rate of loading my appreciation for the industrial indirect costs estimated in the production centers.

The advantage of this method is that it provides a quick data helps management in the industrial indirect costs of planning and loaded firsthand on production without waiting to the end of the fiscal year as it enables management to a private product prices layout in case production is frequent also enable management to control the industrial indirect costs and the actual measurement of the deviations between the estimated and actual costs and study the causes and hold those responsible accountable them so as not to repeat them afterwards.

And maligned on this method is the possibility of their industrial cost estimates indirect inaccuracies but not fully sure due to the seasonal nature of production and the lack of forecasting accuracy at the cost components in addition to the unusual breakdowns that occur during operation.

2 - the actual download rate method:

According to this method is limited to measuring industrial actual indirect costs in the production of ozone-depleting production centers and centers of production services during the period of activity is also determined by the actual loading of the costs of industrial indirect actual rate of production centers.

This method are easy to inventory and measure the industrial actual indirect costs and thus easily determine the actual loading of the costs of industrial indirect rate in the production centers and then easily identify the unit's share of these costs.

And maligned on this method is that it provides management he cost industrial indirect at the end of the period of cost data, which reduces the usefulness of this data in planning costs and product prices in controlling them and that they enable management to measure the deviations of actual costs for estimated costs of inventory loading differences and to study its causes and then processed accounting.

There are two types of loading differences:

- Increasing the load: and in the case of increased industrial indirect costs charged to the estimated production for industrial indirect costs actual depleting during the period.

- Lack of loading:

And in the case of industrial costs deficiency indirect estimates charged to production for the indirect costs of actual industrial depleted during the period.

The reasons for the differences between industrialized and indirect costs estimated and actual to the following reasons:

1 - the seasonal nature of production.

2 - errors in estimating industrial indirect cost elements.

3 - extraordinary circumstances or emergency during the period cost.

By using activity based costing . through classification of the indirect manufacturing costs to homogeneous cost pools and calculating many predetermined application rates for each pool in the beginning of each fiscal year .

I agree with Mr.Vaiyapuri & Mr. Duncan's 

Agree with expert ansewrs above