Indirect Cost: Meaning and Examples

Definition and Meaning

Indirect costs are part of the costs of production (rendering of services) that cannot be directly included in the cost of a certain type of product or service without additional calculations or it is economically unreasonable. Indirect costs, unlike direct ones, are not related to a certain type of product, but a period.Indirect costs can be classified as follows:

  • Production costs – the cost of maintaining the main and supporting production facilities of the organization.
  • Administrative costs – costs associated with the needs of the organization’s management and not directly related to the production process.
  • Selling and distribution costs – expenses associated with the sale of goods, performance of work, or the provision of services. These are the costs of conducting marketing research, promoting products to the market, advertising costs, packaging costs, transportation costs, salesmen’s salaries, etc.

Examples of Indirect Costs

Indirect costs include:

  • Salaries of managers and workers who are not directly involved in the production, such as a CEO or an accountant, and other administrative expenses
  • Costs associated with the preparation and organization of production
  • Expenses for internal transportation of materials, components, semi-finished products, and finished products
  • Maintenance and repair of buildings, structures, equipment, and vehicles
  • Depreciation of buildings, structures, equipment, and vehicles
  • Costs of ensuring good working conditions and labor protection
  • Costs of recruiting, hiring, training, and retraining personnel
  • Payment for services provided by external organizations, for example, communication services
  • Premises and equipment rent
  • Utility payments
  • Mandatory fees and taxes
  • Patent fee
  • Market research and advertising costs
  • Any other spendings that cannot be attributed to the creation of a specific product.

The bulk of the indirect costs are fixed costs, i.e. do not depend on the volume of production. For example administrative expenses, expenses associated with the preparation and organization of production, and rent. Variable indirect costs are manufacturing costs that vary roughly in relation to changes in production output. Examples of variable indirect costs include advertising, office supplies, utilities, and production supplies.

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