WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Accounting Tutorials » Income Statement Tutorials » Indirect Costs

Indirect Costs

By Madhuri ThakurMadhuri Thakur | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

What is Indirect Cost?

Indirect cost is the cost that cannot be directly attributed to the production as these costs are incurred in general costs and can be fixed or variable in nature like the office expenses, salary paid to administration, sales promotion expense, security and supervision expense, etc.

It is a cost that can’t be easily identified for each cost object. For example, let’s say that the firm is buying machinery for producing toys for children in consideration of $50,000. Now, a firm decides to produce 1000 units in one month and 5000 units in the next month. Would it be possible to identify how much production cost of each unit is since the cost of machinery remains the same no matter how fewer or more the firm produces?

The answer is no because it isn’t easy to identify the cost of each unit produced.

Indirect Costs - Colgate

Indirect Cost Example

Let’s say that Company G hires an on-site supervisor for its plants. And the company decides to pay him $50,000 per year. His job would be to visit the plants on a regular basis and supervise whether the work is done properly or not. At the end of the month, he will find the discrepancies in the plants and provide recommendations to deal with them through a report.

  • In this case, if we look at the cost incurred for the plants by the company, it would be the indirect cost because it’s impossible to tell how much time and effort the supervisor would invest in each plant.
  • At the same time, if we look at the salary of the supervisor as a whole, it is the direct cost of the company; because the salary of the supervisor can easily be identified.

If we go deep, we would see the same scenario in the cases of fixed costs and variables costs as well.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

We can take an example to illustrate this.

Let’s say that Company M pays a fixed rent of $5000 every month for a factory on rent. If the company produces thousands of products within the factory, it would be impossible to identify each unit and attribute a portion of rent expenses into it. Moreover, no matter how much the factory produces, the rent doesn’t change.

Company M also rents 3 more factories at $4000, $6000, and $8000. And every month, Company M pays the rent for each factory. Since the payment each month doesn’t change, they can be called variable costs as well because the company will pay more if it rents for multiple months and less if it takes rent for a few months.

Indirect Cost vs. Fixed Costs

Fixed costs are the costs that don’t change with the number of units produced. For example, if a piece of machinery can produce 100,000 finished products and you have paid $200,000 to buy it – it won’t matter how many units you produce using that machinery; the cost of machinery would remain the same.

This is similar to indirect costs. For example, if you take a car on lease and you pay a lump sum every month, then you can use it as much as you can. The lessor will not see how much you would use it (and how many times) since as a lessee, you are servicing and maintaining it, and also you are paying for it.

So, indirect costs can easily be labeled as indirect fixed costs.

Video

Recommended Articles

This has been a guide to what is indirect costs, along with its definition and meaning. We also discuss indirect costs examples along with its comparison to fixed cost. You may also learn more about accounting from the following articles –

  • Types of Indirect Tax
  • Direct Cost vs Indirect Cost
  • Calculate Capitalization Cost
  • What is Variable Costing?
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More