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Question
Explain ‘Indirect cost’.
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Solution 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.
Solution 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.
