Indirect Expenses

Indirect Expenses Meaning

Indirect Expenses are those expenses that cannot be assigned directly to any activity since these are completely incurred while operating a business or as a part of a business, examples of which include business permits, rent, office expenses, telephone bills, depreciation, audit, and legal fees.

Examples of Indirect Expenses

Below are examples of Indirect Expenses –

  • Depreciation Expenses
  • Rent Expenses
  • Taxes
  • Insurance
  • Advertising Expenses
  • Salaries to Management
  • Commission paid to Agents
  • Telephone Bills
  • Audit Fees
  • Legal Fees
Indirect Expenses

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For eg:
Source: Indirect Expenses (wallstreetmojo.com)

Types of Indirect Expenses

It classifies into three types-

Calculate Indirect Expenses

From the following information, calculate the total indirect expenses of the company for the month ending on September 30, 2019.

Solution

Indirect expenses are the expenses that are indirect, and we cannot assign these directly to the manufactured goods and services. Out of all the transactions given above, all the expenses listed are the indirect expenses except the raw material cost and the direct labor cost as they are part of the direct expenses.

So, total indirect expenses will be calculated as follows:

Indirect Expenses Example
  • = 50,000+10,000+5,000+10,000+25,000+100,000+200,000
  • Total = 400,000

Thus the total indirect expenses of the company for the month ending on September 30, 2019, are $400,000

Advantages

The different advantages related to the indirect expenses are as follows:

  • Lower-level of tax liability- With indirect expenses, an organization can reduce its taxable income and hence, lower its tax liability.
  • Effective product pricing- Product pricing is an essential mechanism for organizations. With indirect costs, organizations can effectively price their products, leverage their sales, and earn better revenues.

Disadvantages

The different advantages related to the indirect expenses are as follows:

  • Probabilities of price-out- Managing indirect expenses could be challenging for organizations, and the failure in doing so could even price them out of the industry. It is high because, with the rise in overhead expenses, companies may feel compelled to raise the price of their products, which may ultimately price them out of the industry they operate in.
  • Recurring nature- The indirect overheads are recurring in nature. These expenses will continue to incur even if the company is not earning revenues or during manufacturing downtime.

Limitations

The different advantages related to the indirect expenses are as follows:

Important Points

Conclusion

Indirect costs are also known as overhead costsOverhead CostsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more. These are the expenses that can be applied to multiple business activities. These expenses are indirect, and hence, the same cannot be directly assigned to the manufactured goods and services. Professional fees, rent, taxes, insurance, utilities, employee salaries, advertising, office rent, depreciation, office supplies, etc. are some examples of indirect costs.

Factory expenses, administrative expensesAdministrative ExpensesAdministrative expenses are indirect costs incurred by a business that are not directly related to the manufacturing, production, or sale of goods or services provided, but are necessary for the smooth functioning of business operations, such as information technology, finance & accounts.read more, and selling and distribution expenses are the three types of indirect expenses. With the help of these expenses, organizations can minimize their cost of production, enhance their revenues, and reduce their tax burden. Organizations can also reduce their expenses by evaluating the importance of the costs of operating the business and appropriately chose the best ways to reduce the same.

This article has been a guide to Indirect Expenses and its meaning. Here we discuss the types of indirect expenses along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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