Indirect Costs

Expenses that cannot be directly traced to specific cost objects, requiring allocation using rational methods to assign costs to products, services, or departments.

#Revenue and Expenses#Cost Accounting#Overhead Management

Indirect Costs

Expenses that cannot be directly traced to a specific cost object, but are necessary for overall operations and must be allocated to products, services, departments, or projects using rational distribution methods.

For example, a manufacturing plant’s electricity bill of $20,000 represents an indirect cost that benefits multiple production lines, requiring allocation based on machine hours, square footage, or other appropriate bases to determine the portion attributable to each product.

Indirect costs, often called overhead, include facility costs, administrative salaries, equipment depreciation, and other shared resources. Their allocation significantly impacts reported product costs and profitability, particularly in environments with diverse products or services. While direct costs provide a more objective basis for decision-making, properly allocated indirect costs are essential for understanding full economic costs and making informed pricing and production decisions.