Indirect Costs Meaning | Definition | Examples

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indirect costs meaning

Indirect Costs Meaning and Definition

Indirect Costs Meaning – It is the cost that is not attributable to a single activity or a product. Costs that incurs in performing various polls of activities.  These costs includes overhead expenses such as rent, utilities, etc.

Definition of Indirect Costs – “Costs not directly attributable to the manufacture of a product or the provision of a service”.

It is very important to identify the indirect costs so that management can exclude it. This step is very important in order to set a price which is above the variable costs.

Indirect Costs Example

XYZ is garment manufacturing firm which specializes in ready – made garments. What are the direct costs here? raw material and wages of labor are direct costs here. What is the indirect costs here? The depreciation charge on the building, salaries paid to employees, etc.

Some of the indirect costs examples are : –

  • Accounting and legal expenses
  • office expenses
  • utilities
  • rent
  • telephone expenses
  • administrative expenses

Types of Indirect Costs

There are two types of indirect costs. These are fixed indirect costs and recurring indirect costs.

Fixed Indirect Costs  are the costs that are fixed for a particular activity or a project.

Examples  are :-

  • cost incur in transporting of labor from one site to another
  • building sanitation facilities for temporary, etc.

Recurring Indirect Costs are those costs that are of  repetitive nature. In simple words, these are the activities that repeats again and again in an enterprise.

Examples are

  • paying salaries
  • legal fees
  • accounting fees, etc.

Indirect Costs Vs Direct Costs

Directs are directly attributable to a production process, however indirect costs are not traceable to a production activity.

Example of direct costs are – wages and salaries of a production staff or raw material requirement for a project.

Indirect costs examples are – salaries of employees from various departments, rent, depreciation, legal fees, etc.

Related Financial Terms of Indirect Costs

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