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
- 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.
- 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
- Income Statement Definition, Meaning | Format | Importance
- Current Assets Meaning & Examples | What are Current Asset?