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February 9, 2009

Is depreciation a direct or indirect cost?

Depreciation can be either a direct cost or an indirect cost, or it can be both direct and indirect.

Let’s illustrate this with the depreciation of a machine used in Department 23 of a manufacturer. The depreciation on that machine is a direct cost for Department 23. It is direct because it is traceable to Department 23 without any allocation.

The depreciation of this same machine will be an indirect cost of the products manufactured with that machine. It is indirect because the depreciation is allocated to the products. Perhaps the machine in Department 23 has depreciation of $50,000 per year (cost of machine of $500,000 divided by 10 years of useful life). The $50,000 of annual depreciation is then assigned or allocated to products based on the number of hours that products use the machine. For example, if the manufacture expects 20,000 machine hours of use in the current year, then it assigns or allocates $2.50 ($50,000/20,000) per machine hour to each product using the machine. If Product #189 requires one hour of this machine’s time, Product #189 will have $2.50 as part of its indirect costs. Indirect manufacturing costs are also referred to as manufacturing overhead, factory overhead, or burden.

Learn more about Manufacturing Overhead.

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Comments

8 Responses to “Is depreciation a direct or indirect cost?”

  1. kovammal suresh on February 9th, 2009 12:13 pm

    i want to know more about accountancy..please help

  2. Yogesh Deshmukh on February 10th, 2009 2:24 am

    This site is too good to understand the accounting concept. Many thanks accountingCoanch.
    Yogesh Deshmukh, Mumbai, India

  3. duncan on March 3rd, 2009 2:59 am

    I know it is very common to use the word allocation in the way you have but you really ought to have used the word apportionment as well. You have correctly described the allocation of costs.

    Apportionment relates to the sharing of costs such as the depreciation costs you described. That is, shared out in proportion to perceived benefit received.

    I wish that the people who set the agenda would NOT interfere with these things. Allocation and apportionment are different and it helps anyone who is learning cost accounting to appreciate that.

    Duncan

  4. mustafa on March 6th, 2009 1:24 am

    hi

  5. jim on May 26th, 2009 1:15 pm

    why is depreciation included in 10-Ks under Expenses without affecting Total Expenses? Is it because it is a deduction and thus shown merely as an info item?

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