How to Account for Indirect Hours
Indirect hours represent labor in a production department that does not affect manufacturing activities. Companies must account for these hours because the cost of labor does impact produced goods. Examples of indirect hours include wages or salaries for supervisors, maintenance employees, purchasing agents and dock workers, among other groups. Companies often include this information in the manufacturing overhead related to production activities. Data for the related hours are necessary to prove the indirect hours are accurate and valid for manufacturing overhead.
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Instructions
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Identify all workers that are indirect to the company's production process.
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Create time sheets for all indirect workers. Workers paid hourly wages need to report the total number of hours worked in the production department. Salaried workers may not need time sheets.
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Calculate the cost of indirect employees working in the production department. Multiply the hours worked by each worker's wage.
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Add the total dollar amount for all indirect workers to the manufacturing overhead account. For example, debit work-in-process and credit the wages expense to record the overhead cost.
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Divide the total manufacturing overhead by a cost driver, such as machine hours. For example, $100,000 in manufacturing overhead with a cost driver of 40,000 machine hours results in an allocation rate of $2.50 per machine hour. This is the company's predetermined overhead rate.
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Allocate manufacturing overhead costs using the company's predetermine overhead rate. One widget requiring a single machine hour incurs $2.50 of manufacturing overhead costs. Producing 1,000 widgets will result in $2,500 of manufacturing overhead costs, which includes indirect labor.
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Tips & Warnings
Records for all indirect hours will need to go with information relating to the goods produced in the company. Historical records are often necessary to track variances or other data in the production process.
