What are Indirect Costs?
What is an Indirect Cost?
Indirect costs are costs derived from overhead expenses or expenses relating to subsidiary work. They are not directly related with the making of a specific product or service as with direct costs.
These costs are allocated indirectly to the total cost of production of a product or the total cost of rendering a service.
Indirect costs often include most of the fixed costs. These are costs that should be monitored closely to ensure the entity's working capital is management successfully.
To reduce indirect costs within reason is a good idea as this ensures your business is operating in a lean and efficient manner and it allows space for fluctuation ie. economic cycles.
Frequently asked questions
What are examples of the types of indirect costs?
- Administration costs
- Administrative expenses
- Labor costs
- Office Supplies
- Rent
- Security costs
- Telephone and internet
- Office expenses
- Utilities
- Rent
What can business owners do to achieve their indirect cost objectives?
Setting budgets and limits on spending are the essential first step in managing the total indirect costs.
What are indirect cost rates?
The indirect cost rate is the ratio between the total indirect costs and the direct cost base.
Are variable costs the same as indirect costs?
Variable costs increase with the level of production for example stock bought, they can furthermore be directly associated with the production of a certain good or service. Indirect costs on the other hand can't be directly associated with a specific product.
Why do indirect costs increase or decrease?
- Incorrect estimates
- Variations in the amount of clients served throughout the reporting period.
- Changes in the phases of projects that the business is working on.
- Changes in the types of work, contracts and/or services.
- Lack of management oversight.
- Price increases from vendors
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