Indirect costs account for a large portion of a company’s total costs. Therefore, it is important that they are well managed and monitored. Find out what indirect costs are.
What are indirect costs? Definition of the term
Indirectcosts are any costs that are not directly related to the production of a product or service. Thus, these are costs that are not directly visible in the price of the product, but are necessary for its production. Indirect costs include the cost of employee wages, the cost of materials and raw materials, the cost of energy and water, the cost of maintaining buildings and machinery.
In a company, indirect costs are necessary to run the business. However, it is worth remembering that their amount should be kept to a minimum. Some indirect costs, such as the cost of employee salaries, are directly related to production and cannot be avoided. Others, such as the cost of materials and raw materials, can be reduced through good resource management.
Division of indirect costs
Indirect costs are costs that cannot be directly attributed to any specific activity in the company. Thus, they are costs that “pass through” all departments and are necessary for the operation of the entire organization.
Indirect costs include, among others:
- overhead costs (administration, accounting, etc.),
- Building and equipment maintenance costs,
- security and safety costs,
- research and development costs,
- advertising and promotion costs.
Thus, indirect costs are very important for the operation of any company, but at the same time they are difficult to clearly allocate to specific products or services. Therefore, the allocation of indirect costs is often difficult and time-consuming.
The most common methods of allocating indirect costs are: the calculation method, the market analysis method, and the flow analysis method.
The choice of indirect cost allocation method depends on many factors, such as the type of product or service, cost structure, data availability, purpose and scope of allocation.
Regardless of the method used, the allocation of indirect costs should be as precise as possible and reflect reality. Otherwise, it can lead to erroneous conclusions and suboptimal decisions.
What is included in indirect costs?
Indirect costs are an important part of any company budget. They include all costs that are not directly related to the production or sale of goods or services. Companies can have a wide variety of indirect costs, but they most often include administrative costs, such as salaries for office staff, fees for renting or leasing office and office equipment, as well as the cost of upkeep and maintenance of company cars.
Indirect costs – examples
Companies incur various types of costs. Some are directly related to production or sales, such as the cost of materials, the cost of employee salaries. Other costs are indirect and are not directly related to production or sales, but are necessary for its operation. Examples of such costs are administrative costs, general and administrative expenses, maintenance costs for machinery and equipment. Administrative costs are the costs a company incurs to run an office and hire administrative staff. These are fixed costs and must be incurred regardless,
Also find out what direct costs are.
