Indirect Costs

Indirect costs of an activity which are not easily associated with the production of specific goods or services. It is difficult to associate directly to a specific costing object. It is also called as Common cost. Cost that is common or shared by more than one cost object is indirect cost. .Indirect costs have an impact on the overall operation of the business, making it very difficult to charge the costs to a specific department or associate them with one function. Indirect costs are also referred to as overhead costs.

Indirect costs are usually constant for a range of output. They are usually grouped under fixed assets.  One of the examples of indirect cost is National advertising that benefits more than one product and sales territory. Fixed factory overhead is also another indirect cost.

Indirect costs occur in both the small and large businesses. In the administration department the general supplies used are indirect expenses. The stationery items such as paper, pens, and other essentials used in the business for record keeping and other clerical jobs are classified under indirect costs. Another example of indirect costs is auditing the accounting books or the preparation of legal documents in the services industry are expenses that impact the entire operation and are usually considered indirect in nature.

Some of the expenses that are related to the up keeping and maintenance of the business facilities are also classified under indirect expenses. Utilities used in the business such as electricity, water, and Internet access are expenses that benefit the business in general and thus are classified as overhead expenses.  

The documentation of indirect cost allocation varies from one company to another. Some companies create a general line item that accounts for all indirect costs. Some companies choose to create a line item in the budgets of each department and then divide the overhead among them equally.

Questions

• What is Indirect Cost?
• What are various indirect costs in business?