A type of indirect cost incurred to benefit more than one cost object is a(n) ______ cost.
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2 CFR 200, Subpart F, Appendix IV, Section C.1.b., c., d., and e identifies and defines the following indirect cost rates: Show
Provisional USAID predominantly uses the provisional and final indirect cost rate methodology when negotiating rate agreements. 2 CFR 200, Subpart F, Appendix 4, Section C.2.f. states that provisional and final rates must be negotiated where neither predetermined nor fixed rates are appropriate. Predetermined or fixed rates may replace provisional rates at any time prior to the close of the organization's fiscal year. If that event does not occur, a final rate will be established and upward or downward adjustments will be made based on the actual allowable costs incurred for the period involved. To prevent substantial overpayment or underpayment of indirect cost during the fiscal year, a revised provisional rate may be requested by the organization. After USAID issues a final indirect cost rate, M/OAA/CAS/OCC will establish a provisional rate for the next fiscal year. When an organization considers the final indirect cost rate to be a reasonable estimate of its rate for coming year, it will be established as the new provisional rate. If this is not the case, an organization provides a detailed forecast to support the rate they consider more accurate. Final Note that a final indirect cost rate is established after an organization's actual costs are known, typically a fiscal year. Once established, a final indirect cost rate is used to adjust the indirect costs claimed. Predetermined A predetermined rate may be negotiated for use on Federal awards where there is reasonable assurance, based on past experience and reliable projection of the organization's costs, that the rate is not likely to exceed a rate based on the organization's actual costs. Fixed Fixed rates may be negotiated where predetermined rates are not considered appropriate. A fixed rate, however, must not be negotiated if (i) all or a substantial portion of the organization's Federal awards are expected to expire before the carry-forward adjustment can be made; (ii) the mix of Federal and non-Federal work at the organization is too erratic to permit an equitable carry-forward adjustment; or (iii) the organization's operations fluctuate significantly from year to year. 10% De minimis 2 CFR 200, Subpart E, Section 200.414 (f) specifies that any non-Federal entity that has never received a negotiated indirect cost rate may elect to charge a de minimis rate of 10% of modified total direct costs (MTDC) which may be used indefinitely. As described in 2 CFR 200, Subpart E, Section 200.403, Factors affecting allowability of costs, costs must be consistently charged as either indirect or direct costs, but may not be double charged or inconsistently charged as both. If chosen, this methodology once elected must be used consistently for all Federal awards until such time as a non-Federal entity chooses to negotiate for a rate, which the non-Federal entity may apply to do at any time. See Appendix II of this guide titled, “Frequently Asked Questions,” for additional information on the 10% De minimis rate. Costs incurred in manufacturing a product What are Product Costs?Product costs are costs that are incurred to create a product that is intended for sale to customers. Product costs include direct material (DM), direct labor (DL), and manufacturing overhead (MOH). Understanding the Costs in Product CostsProduct costs are the costs directly incurred from the manufacturing process. The three basic categories of product costs are detailed below: 1. Direct materialDirect material costs are the costs of raw materials or parts that go directly into producing products. For example, if Company A is a toy manufacturer, an example of a direct material cost would be the plastic used to make the toys. 2. Direct laborDirect labor costs are the wages, benefits, and insurance that are paid to employees who are directly involved in manufacturing and producing the goods – for example, workers on the assembly line or those who use the machinery to make the products. 3. Manufacturing overheadManufacturing overhead costs include direct factory-related costs that are incurred when producing a product, such as the cost of machinery and the cost to operate the machinery. Manufacturing overhead costs also include some indirect costs, such as the following:
Example of Product CostsCompany A is a manufacturer of tables. Its product costs may include:
Company A produced 1,000 tables. To produce 1,000 tables, the company incurred costs of:
Total product costs: $12,000 (direct material) + $2,000 (direct labor) + $100 (indirect material) + $500 (indirect labor) + $500 (other costs) = $15,100. As this is the cost to produce 1,000 tables, the company has a per unit cost of $15.10 ($15,100 / 1,000 = $15.10). Period CostsProduct costs are costs necessary to manufacture a product, while period costs are non-manufacturing costs that are expensed within an accounting period.
Consider the diagram below: Costs on Financial StatementsProduct costs are treated as inventory (an asset) on the balance sheet and do not appear on the income statement as costs of goods sold until the product is sold. For example, a company manufactures 50 units of widgets at a unit product cost of $5. On the balance sheet, there would be a $5 x 50 = $250 increase in inventory. If the company sells 20 units of widgets, $5 x 20 = $100 in inventory would be transferred to the cost of goods sold on the income statement while the remaining $150 would remain in inventory on the balance sheet. Download the Free TemplateEnter your name and email in the form below and download the free template now! Product Costs TemplateDownload the free Excel template now to advance your finance knowledge! More ResourcesThank you for reading CFI’s guide on Product Costs. To keep learning and advancing your career, the following resources will be helpful:
What are the indirect cost incurred?Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).
What type of cost is indirect material?It is an expense, which is included in Overhead Cost of manufacturing cost, and consists of subsidiary material cost, shop supplies cost, perishable tools and equipment cost. Here the material means the one indirectly or supplementarily consumed.
What are the examples of indirect cost?Indirect costs include supplies, utilities, office equipment rental, desktop computers and cell phones. Much like direct costs, indirect costs can be fixed or variable. Fixed indirect costs include expenses such as rent; variable indirect costs include fluctuating expenses such as electricity and gas.
What are the 4 types of costs?Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.
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