Indirect cost

Definition

Indirect costs, commonly referred to as overhead costs, are expenses that are challenging to directly assign to a specific product, project, or activity.

What are indirect costs?

Unlike direct costs, which can be directly tied to a specific cost object, indirect costs are incurred for the overall operation of a business and are shared among various cost objects. Indirect costs are often considered fixed costs as they do not vary directly with production levels and are incurred regardless of the volume of goods or services produced.

Understanding and properly allocating indirect costs is important for businesses to determine the true cost of production, set pricing strategies, and assess overall profitability. It helps in making informed decisions about resource allocation and budgeting.

Examples of indirect costs

1. Overhead costs: Costs associated with the general operation of a business, including rent, utilities, insurance, and property taxes.
2. Administrative salaries: Salaries of employees who provide administrative support but may not be directly involved in production or service delivery.
3. Depreciation: The gradual loss of value of long-term assets like machinery or buildings over time.
4. Maintenance costs: Costs incurred to maintain and repair equipment or facilities that support overall business operations.
5. Indirect labour: Wages of employees who contribute to the overall functioning of the business but are not directly involved in production.