Indirect Costs

What are Indirect Costs?

Indirect costs or indirect expenses, are costs which cannot be traced directly to a particular cost object. The cost object is usually a product in the manufacturing industry, but can be any object to which the business is seeking to assign costs to such as a department, activity, project, customer, or geographic area. In schools, for example, the cost object might be students or a subject department, in the healthcare industry, the cost object might be a patient or medical department.

Allocation of Indirect Costs

If appropriate, indirect costs need to be allocated to the cost object using some predefined basis. For example a business with say four departments to which it assigns direct costs, might allocate a quarter of the indirect costs to each department, or as an alternative it might allocate the indirect costs in proportion to the direct costs assigned to a particular department.

Example of Indirect Costs

In a manufacturing business the materials and labor used to manufacture a product can be directly traced to the product (the cost object) and are therefore direct costs, on the other hand insurance and professional fees might not be attributable to the product directly and are therefore classified as indirect costs.

An example of indirect costs in healthcare industry might be the cost of utilities such has gas, electricity, and water which are for the benefit of the whole operation and not one department and cannot be traced to a cost object, such as the emergency department. On the other hand the cost of emergency room medical supplies would be classified as a direct cost, these costs are for the sole benefit of the emergency department and can be traced.

It can be seen that the decision as to whether a cost is indirect or direct depends on the definition of the cost object and therefore the type of business and the industry in which the business operates.

By differentiating between direct and indirect cost it is possible for a business to create budgets for a cost object (such as a department) and give responsibility for that budget to a manager. The manager will be held responsible for the direct costs (such as departmental wages) which they can control, but will have no responsibility for the indirect costs (such as insurance cover) over which they have little or no control.

For further information see the Wikipedia definition.

Learn a new bookkeeping term

Random bookkeeping terms for you to discover.

Link to this Indirect Cost Definition

Click in the box to copy and paste this indirect cost definition link to your site.

Return to the Glossary

Indirect Costs February 28th, 2018Team

You May Also Like

Related pages

notes receivableswhat is the purpose of the retained earnings statementhow to calculate weighted average contribution marginwhat is an accounting equationgeneral entries of accountingamortization schedule calculationannuity payments calculatorrecording prepaid insuranceequity gearing formulahow to compute manufacturing overhead rateinventory turnover calculation exampleroe formulasfour accounting conceptsjournal entry for unrealized gain on trading securitiesroa ratio formulagrowing annuitiesbalance sheet from trial balance examplescvp costingsample cash receipts journalwhat is the journal entry for accounts payabledays receivable outstanding formulaloan calculator with balloon payment excelsundries expenses examplesproject completion method of accountingincome tax adjusting entrywhat is office supplies expense in accountingreverse allowance for doubtful accountshow to calculate factory overhead rateperpetuity modelannual depreciation straight line methodcalculation for markupallowance for doubtful accounts debit or creditaccounts receivable spreadsheet templatereceipt book template excelrealisable value meaningcalculate npv excelroce ratio exampledebtor days definitionoverhead recovery rate formulawhat are prepayments and accrualsfixed asset turnover industry averagedefine amortizationis bonds payable a current liabilityperpetual inventory system examplecash flow statement equationdefine contra assetstraight line method of calculating depreciationratios accounting formulasvalue of an annuity calculatorfob prepaiddiscounting promissory notessample timesheet template excelledger controlbep formuladiminishing depreciation methodinventory turnover ratio formulabasic bookkeeping formspresent and future value tablesbalance day adjustmentsmark up in accountingwhat is variable cost in accountingweighted average inventory costingincome summary journal entrymarkup margin calculatorprepaid rent debit or creditfuture value of a perpetuitytrial balance for dummiesfixed asset register exampleaccounting general ledger examplepayback period formula examplebad debts journal entriesjournal entry for sale of inventorydepreciation spreadsheetwhat is provision for doubtful debtledger book pdfdepreciated assetsroa ratio formulathe accounting cycle 10 stepsdepreciation of fixed assets journal entry