Indirectcost

Indirectcost, commonly written as indirect cost, refers to costs that cannot be traced to a specific product, service, or project. These costs support multiple activities and are incurred for the overall operation of an organization.

Examples include rents and utilities, depreciation of plant and equipment, administrative salaries, information technology, facility maintenance, and office supplies. By contrast, direct costs can be directly linked to a single cost object, such as raw materials and direct labor.

Because indirect costs cannot be assigned to a single object, they are allocated to cost objects using overhead allocation methods. Common approaches include applying an overhead rate based on a chosen base (for example direct labor hours or machine hours) or using activity-based costing, which assigns costs based on activities that drive costs. Costs are often organized into cost pools (groups of similar indirect costs) before allocation, and accounting uses systems such as job-order costing or standard costing.

In practice, indirect costs appear across contexts: manufacturing overhead, facilities and administrative costs in nonprofits, and research funding. In government and research funding, indirect costs are frequently governed by negotiated indirect cost rates (facilities and administrative costs) with sponsors, affecting reimbursements and budgeting.

Accurate treatment of indirect costs matters for pricing, profitability analysis, budgeting, and financial reporting. Misallocation can distort decision making. Challenges include determining which costs are indirect versus direct and choosing an allocation base, with activity-based costing offering greater precision but at higher implementation cost.