Indirect costs definition — AccountingTools (2024)

FAQs

What is the definition of indirect costs in accounting? ›

Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs.

An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost.

Indirect costs are costs of an organization that are not readily assignable to a particular project, but are necessary to the operation of the organization and the performance of the project.

are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs.

Indirect costs include supplies, utilities, office equipment rental, desktop computers and cell phones. Much like direct costs, indirect costs can be fixed or variable. Fixed indirect costs include expenses such as rent; variable indirect costs include fluctuating expenses such as electricity and gas.

Direct expenses are those that are linked to a specific cost object, while indirect expenses are associated with the entire business and not specific cost objects. Indirect and direct expenses can be either fixed or variable. Most of a company's expenses are indirect.

These costs are also sometimes called “facilities and administrative costs (F&A)” or “overhead.” The terms indirect costs, overhead costs, and F&A costs are synonymous.

There are two categories of indirect costs— overhead, and general & administrative.

1 The steel and bolts needed for the production of a car or truck would be classified as direct costs. However, an indirect cost would be the electricity for the manufacturing plant.

Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation.

How do you find indirect costs? ›

Indirect cost rate calculations rely on cost pools, a value representing total indirect costs broken out and allocated based on percentages calculated in various ways. This is done by dividing the cost pool by a cost object (i.e., a variable such as usage, physical dimensions, project category, department, etc.).

Examples of indirect costs include the salary and related expenses of individuals working in accounting, personnel, purchasing functions, rent, depreciation and utilities.

Indirect Costs—Indirect costs are costs for activities or services that support the organization as a whole rather than any particular program or project, including administrative and fundraising costs.

Utility bills, rental costs, salaries, depreciation, office supplies, and legal charges are a few examples of indirect expenses. Companies must bear these charges to keep running smoothly regardless of the products they manufacture or sell.

Examples: Direct expenses include raw materials, direct labor, and other costs directly incurred in the production process. Indirect expenses encompass items such as rent, utilities, administrative salaries, and other overhead costs.