Indirect Cost – Definition, Explanation, Examples, Formula

Indirect Cost Definition

Indirect costs are the costs that can not be readily determined with a specific activity but are incurred for the joint benefit of company/project activities. Indirect costs are grouped into common pools and charged as an allocation basis with a rate.

An indirect cost is directly identified with multiple cost objectives (not with a single cost objective). Indirect costs are those remaining to be allocated to several cost objectives after direct costs have been determined and charged directly.

Understanding Indirect Cost with Examples

Indirect costs represent the expenses of day-to-day business operations which not readily identified with a contract, project, or activity. But these indirect costs are necessary for the general operation and day-to-day activities of the company.

Cost allocation plans or indirect cost rates are used to spread these indirect costs to relevant revenue sources.

As an example, in a software development related company, the professional salaries can be accumulated for the project to which the professionals are allocated. But indirect costs such as electricity, internet, water, and company premises maintenance cost can not be directly allocated to the projects the company conduct. Instead, these costs will be allocated to the project based on an indirect cost rate.

Indirect costs are expenses that cannot be directly traced to a product, while variable costs differ with the production output level.

Indirect Cost Examples

Following are some examples of Indirect Costs,

  • Accounting Expenses
  • Legal Expenses
  • Administrative Salaries
  • Office Expenses
  • Rent
  • Security Expenses
  • Company Maintenance Expenses
  • Telephone
  • Intenet
  • Water
  • Electricity

Indirect Cost Formula

Indirect Cost = Total Cost – Direct Cost

Indirect Cost Rate (%) = Total Indirect Costs / Direct Cost Base

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