Is Depreciation the Overhead Cost?

Depreciation is the amount of fixed assets which charge as expenses to the income statement during the accounting period.  The depreciation expense will depend on the cost of the asset and useful life. The concept is the spread the cost over its useful life as the asset will decrease its value to zero/scrape value. At the end of fixed useful life, the total expense will equal to fixed cost less scrape value if any.

Depreciation is a non-cash flow transaction, it just the allocation of a fixed asset to expense over the useful life. Cash flow already moves since the day we purchase the asset.

Direct Cost and Indirect Cost

Direct cost is the cost associate with the production of goods. It includes direct material, directed labor, and it varies depending on the number of production.

Indirect cost or overhead is the cost which not related to product produce. They are fixed cost such as Office Staff Salary, Rental and so on.

Is Depreciation is direct or indirect cost (Overhead Cost)?

Depreciation expense is commonly classified as the indirect cost, as it incurs during the accounting period without any implication from production units. It doesn’t matter if the company produces 10 units or 1,000 units, the depreciation charge will remain the same. We cannot trace the consumption of depreciation per unit produced. The company simply add depreciation to the total overhead cost and allocate base on the unit produce during the period.

In some small circumstances, depreciation can charge as a direct cost to the product when the company can trace it to the finished product. For example, in Boeing production, many machines and equipment will be used specifically for each airplane. The depreciation expenses of these fixed assets is a part of production cost, they are linked between the production and expense. Management knows exactly how much deprecation charge per unit.