What are Indirect Expenses?
Indirect costs can be defined as the expenses that are incurred by an organization in delivering its day to day business operations and these costs cannot be apportioned to the cost and selling price of a product and the list of examples include salaries, insurance, rent, rates and taxes, legal charges, advertisement, commission, packing and store supplies expenses, travelling expenses, audit fees, interest on loan, bank charges, amortization, depreciation of equipment, equipment maintenance, utilities, etc.
Explanation
Expenses borne by the company can be of two types- direct expenses and indirect expenses. Direct expenses are the costs that are directly related to the manufacture of goods, such as the cost of raw materials and direct labor expenses. In contrast, indirect expenses are the costs that are indirect in nature. A company incurs these costs in delegating its daily business operations. Indirect expenses can be of two types- fixed indirect costs and recurring indirect expenses.
List of Indirect Expenses
Given below is the list of indirect expenses classified based on various expenses.
- Business and Administration Expenses
- Sales and Marketing Expenses
- Economic and Other Expenses
#1 – Under Business and Administration Expenses
Indirect expenses like salaries, insurance, legal charges, rent, rates, and taxes all fall under the category of business and administration expenses. These expenses are concerned with the administration of the business of an organization. These expenses are discussed in detail as below:
- Salaries: Salaries are the payment by an employer to his or her employees against their services. The salaries offered to employees shall differ from employees to employees, designation to designation, and organization to organization as well. The salaries are usually cleared during the month-end unless otherwise stated in the agreement.
- Insurance: Insurance can be better defined as an arrangement under which an organization avails financial protection from an insurer (insurance company) for their manufactured goods against unforeseen losses caused as a result of damage or theft. It is backed up by a contract that states the right of an entity to receive financial protection against unforeseen losses from an insurer or an insurance company.
- Rent, Rates, and Taxes: Rent is an amount that an entity is required to pay to the landlord for using his or her property for conducting his day to day business operations. The amount of rent to be paid to the landlord and the contract tenure is mentioned in the contract. Rates and taxes can be defined as the number of fees that are paid to municipality for servicing the property used by an entity, and the number of fees charged depends on the type of property used by an entity.
- Legal Charges: Legal charges can be defined as the right of a lending company (lender) to take over the property or other assets of the borrower for failing to pay the borrowed money of the former.
#2 – Under Sales and Marketing Expenses
Indirect expenses like advertisement and marketing, commission, packing and store supplies expenses, and traveling expenses all fall under the category of sales and marketing expenses. These expenses are concerned with the selling and marketing of the goods manufactured and sold by an organization. These expenses are discussed in detail as below:
- Advertisement: An organization incurs advertisement and marketing expenses to enhance their product visibility in the market and to design and implement strategies. It is done to convince the maximum number of audience to purchase their products over other similar products that are offered by its competitors.
- Commission: A commission can be of two types. It can be an expense incurred by an entity for availing the services of a middleman, and it can also be a sort of expense incurred by an entity for paying a particular percentage of profits to the salesman for selling off their products. In the latter case, the higher the sales, the higher shall be the commission earned.
- Packing and Store Supplies Expenses: These expenses are incurred during the packing of products and supplying the same to the sale stores. These costs are generally charged as whenever they incur.
- Traveling Expenses: Travelling expenses can be defined as the costs that are generally incurred while conducting activities related to the business. These expenses can be either of the two types- reimbursable and non-reimbursable. Reimbursable traveling expenses incurred by the employees can be reimbursed, whereas non-reimbursable traveling expenses incurred by the employees cannot be reimbursed. These expenses include the expenses borne by the employees for commuting to office from home and home from the office.
#3 – Under Economic and Other Expenses
Indirect expenses like audit fees, interest on the loan, bank charges, and amortization expenses all fall under the category of economic and other expenses. These expenses are concerned with the economic expenses of the goods manufactured and sold by an organization. These expenses are discussed in detail as below:
- Audit Fees: Audit fees can be defined as a fee paid by an entity to the external auditors against the audit services performed by the latter.
- Interest on Loan: Interest on a loan can be defined as an interest amount that is paid on debts borrowed by an entity. Interest is more or less a type of payment that is paid by a borrower to a lending company (lender) against the amount that is originally borrowed by the former. Interest on the loan is usually calculated as a particular percentage of a principal sum, i.e., the amount that is borrowed.
- Bank Charges: Bank charges can be defined as fees, penalties, or charges levied by a banking institution upon their customers against banking services or failure to make timely payment of EMIs or credit card payments.
- Amortization: Amortization can be defined as the spread of payments over more than one period. Amortization can be used for processes like amortization of assets and amortization of loans.
Conclusion
Indirect expenses are of various types and can be sub-divided into three categories like Business and administration expenses, Sales and marketing expenses, and economic and other expenses. Expenses such as salaries, insurance, rent, rates and taxes, and legal charges are termed as business and administration expenses. Expenses such as commission, packing and store supplies expenses, advertisement and marketing, and traveling expenses are termed as sales and marketing expenses. Expenses such as interest on loan, audit fees, amortization expenses, and bank charges are termed as economic and other expenses.
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