Indirect-charge method

Indirect-Charge Method – The indirect-charge method is a managerial accounting technique used to allocate indirect or overhead costs to products or services that cannot be directly traced. Since indirect costs—such as utilities, rent, or administrative salaries—are shared across multiple products or departments, this method uses a predetermined allocation base (cost driver) to distribute costs fairly. Key Features: Focuses on indirect costs, unlike direct costs that can be directly assigned. Uses a predetermined rate or cost driver to allocate overhead. Helps in accurate product costing, pricing decisions, and profitability analysis. Example: A factory incurs ₹1,00,000 in electricity and rent (indirect costs) and operates 2,000 machine hours in a month. Using the indirect-charge method, the cost per machine hour is ₹50 (₹1,00,000 ÷ 2,000). A product that uses 100 machine hours is allocated ₹5,000 of indirect costs.