Question

Explain ‘Indirect cost’.

Answer 1

Indirect costs refer to the expenses incurred on those items which are not directly chargeable to production. For example, rent of a factory building.

Answer 2

Indirect cost refers to the expenses that are not directly traceable to a specific product, service, or activity but are necessary for the overall operation of a business. These costs support multiple cost units and are often shared across departments or projects.

Unlike direct costs (like raw materials and direct labour), indirect costs cannot be assigned to a single output unit without using an allocation method.

Examples of Indirect Costs:

• Rent of office or factory premises
• Salaries of administrative staff
• Utilities (electricity, water, internet)
• Office supplies
• Depreciation of general equipment
• Maintenance and security expenses

Indirect costs are also known as overhead costs. They play a vital role in determining the total cost of production and are typically allocated using standard costing or activity-based costing systems.