In addition to the direct costs of inventory and shipping, effective managers also need to understand the indirect costs of production or service delivery. Indirect material and equipment costs are things related to the production and supply of your products that are not directly assignable to individual items.
A simple example of an indirect variable cost is printing costs. As you produce more items in your factory you may need to print more manuals or instruction sheets. Ink, toner and the printers themselves (since they wear out, and the number of them that you need depends on how much you print) are all variable costs. Since it's difficult to tie the cost of a printer wear or some ink to a single production unit we call them indirect variable costs.
Where direct materials present you with something you can control on a weekly or monthly basis, indirect material and equipment represent slightly longer term items. You may not be able to get your ink any cheaper, but you may be able to switch to a laser printer and justify the higher printer cost with the lower cost and faster printing of toner based laser printing.
Gas, electricity, machinery, tools, paper, and host of other items can all be classified as indirect material & equipment, and represent opportunities to optimize your business spending. These costs vary with the amount of work you do, but you can't easily assign their costs to individual orders or projects.
Indirect material and equipment are great things for new managers to practice spending control on as they are generally lower risk than direct materials, don't require as swift action, but still show you are taking initiative in areas that matters to the bottom line.
So when you set out looking for ways to cut the cost of providing your products and services, take the time to look past the parts and pieces of what you provide to the equipment and resources used to create them. These components all contribute indirectly to your per piece costs, and represent opportunities to save money on the things you do repeatedly.
As a manager it is your responsibility to understand the variable costs of your department, and take action to manage them. Managers that proactively take steps to control variable costs are recognized and appreciated as people that understand what it takes to make a business successful.
Related Articles
Keep 'em Coming Back for More
By: Daryl Cowie | 03/04/2008 | Management
Let's look at three management tips on increasing the number of times your customers come back looking for more: Product Consumption Strategies, Follow-up Communication, and Lower Prices.
Wanted: Disruptive Leaders
By: Daryl Cowie | 03/04/2008 | Management
Challenging direction, disrupting the status quo, and a willingness to modify your own thinking are the marks of effective leaders. Disruptive managers with the vision, passion, and courage to tackle the most difficult problems are what insightful leaders are looking for.
Seeing the Total Cost Picture - Part 1 of 2
By: Daryl Cowie | 07/04/2008 | Management
It's important to understand costs the same way your executive team understands costs so you can discuss and address them in ways that will be meaningful to them and to your business. Take a look at some management tips on understanding business cost.
Seeing the Total Cost Picture - Part 2 of 2
By: Daryl Cowie | 07/04/2008 | Management
For new managers and middle managers one of the best management tips you will ever learn is to start with the variable costs. Variable costs are everywhere, they are often the biggest business expense, and it is possible for managers at every level to influence spending in this area.
Tackling the Cash Flow Problem - Part 1 of 3
By: Daryl Cowie | 08/04/2008 | Management
The biggest challenge in controlling variable costs is that you often need to make the decision to spend before the actual sale is made, and you often need to pay your bills before you can collect payment. To top it all off, if you guess wrong on your planned income you still need to pay your vendors and your staff.
Tackling the Cash Flow Problem - Part 2 of 3
By: Daryl Cowie | 08/04/2008 | Management
Suppose now that our business gets an order for $100,000, ten times our usual monthly amount. This is a great problem to have, but it can also be very dangerous for a company if they don't manage it right.
Tackling the Cash Flow Problem - Part 3 of 3
By: Daryl Cowie | 08/04/2008 | Management
Let's look at the 4 big management tips to keep your cash flow situation running smoothly...
Shipping Cost Savings Goldmine Management Tips
By: Daryl Cowie | 25/04/2008 | Management
Packaging, shipping and handling costs represent a large portion of variable business costs and are often overlooked by inexperienced planners. As a result in many businesses this presents a fabulous opportunity to make changes that will have an immediate and noticeable effect.
Got a Question? Ask.
Ask the community a question about this article:
Q&A Powered by:
Latest Management Articles
Diversity Management
By: Janine Sergay | 16/10/2008
Opportunity for all
Is it not every individual's right to be afforded opportunities to put forward their best efforts? To develop their potential? And to show their worth through the results they produce? Not only is this a moral and ethical imperative but, within many countries, a legal one too.
Simple statistics...
Inventory Management System for Proper Demand and Supply
By: spinxwebdesign | 16/10/2008
Inventory management system is being popularly used by many companies and organization worldwide.
Executive Coaching India : How Does Coaching Work?
By: Vaishally Nath | 14/10/2008
Executive Coaching India
www.executivecoachingindia.com
The Orange Academy (www.executivecoachingindia.com) is one of the front runners of coaching in India. The organization has in its fold world class coaches with sizeable experience and insights at the leadership levels. Their expertise gives The Orange Academy an edge to provide the best of coaching results.
This article outlines the coaching process and answes some frequently asked questions by the users consumers of coaching services.
Six Sigma Green Belt Certification
By: Robert | 14/10/2008
six sigma green belt certification as an employee can increase your effectiveness as an employee and save you thousands or millions of dollars as a business owner.
Tips on Looking for a Good Venture Capital Business Firm
By: Trisha Rich | 14/10/2008
Numerous ventures are experienced with the challenging task of increasing thier venture capital. If you are one them, then this process might be helpful on finding the right venture capital firm for your business. Although this may look easy.
Improve Employee Performance by Letting "talkers" Speak
By: Barbara Brown, PhD | 14/10/2008
If you have employees who love to talk, consider using their passion for talking as a way to encourage greater cooperation and contributions. This article explains the usefulness of this approach and gives you four situations where you might apply it.
Payroll Frequency: the Difference and the Cost Savings
By: Rebecca Beckett | 14/10/2008
It is essential that companies consider payroll frequency when looking for a way to cut costs. Choosing the frequency best for your company will make for a smooth process.
Problem-solving Success Tip - Know the Job is Really Done
By: Jeanne Sawyer | 14/10/2008
Know a job is REALLY done by using completion criteria. You don't want to tell someone who has worked really hard to complete a task that what they did isn't what you meant. This tip tells you how to avoid this common problem.
More from Daryl Cowie
How to Use Contractors as Insurance for Staffing Risk Management
By: Daryl Cowie | 19/05/2008 | Management
Have you ever sat next to a contractor who you knew was making a better hourly rate than you for doing the same job? They have no long term commitment to the company, often less experience than you, and still you know they are being paid a premium for being there. It makes you wonder what the financial genius who hired them was thinking when they approved that plan doesn't it?
3 Alternatives to Hiring Full Time Staff
By: Daryl Cowie | 19/05/2008 | Management
How do you quickly turn up and down the amount of labor you pay for when your employees are relying on you for their livelihood? Here are some practical management tips for building a flexible, variable sized workforce...
Shipping Cost Savings Goldmine Management Tips
By: Daryl Cowie | 25/04/2008 | Management
Packaging, shipping and handling costs represent a large portion of variable business costs and are often overlooked by inexperienced planners. As a result in many businesses this presents a fabulous opportunity to make changes that will have an immediate and noticeable effect.
Tackling the Cash Flow Problem - Part 3 of 3
By: Daryl Cowie | 08/04/2008 | Management
Let's look at the 4 big management tips to keep your cash flow situation running smoothly...
Tackling the Cash Flow Problem - Part 2 of 3
By: Daryl Cowie | 08/04/2008 | Management
Suppose now that our business gets an order for $100,000, ten times our usual monthly amount. This is a great problem to have, but it can also be very dangerous for a company if they don't manage it right.
Tackling the Cash Flow Problem - Part 1 of 3
By: Daryl Cowie | 08/04/2008 | Management
The biggest challenge in controlling variable costs is that you often need to make the decision to spend before the actual sale is made, and you often need to pay your bills before you can collect payment. To top it all off, if you guess wrong on your planned income you still need to pay your vendors and your staff.
Seeing the Total Cost Picture - Part 2 of 2
By: Daryl Cowie | 07/04/2008 | Management
For new managers and middle managers one of the best management tips you will ever learn is to start with the variable costs. Variable costs are everywhere, they are often the biggest business expense, and it is possible for managers at every level to influence spending in this area.
Seeing the Total Cost Picture - Part 1 of 2
By: Daryl Cowie | 07/04/2008 | Management
It's important to understand costs the same way your executive team understands costs so you can discuss and address them in ways that will be meaningful to them and to your business. Take a look at some management tips on understanding business cost.
Business 
About the Author:
