For example, if an employee is hired to work on a project, either exclusively or for an assigned number of hours, their labor on that project is a direct cost. If your company develops software and needs specific assets, such as purchased frameworks or development applications, those are direct costs. You can reduce other indirect costs, like advertising, by engaging customers through social media or using other inexpensive marketing ideas. The above expenses are considered indirect if they cannot be applied toward a single product or service.
Often, such as when applying for funding under a grant, indirect costs are specified as a fixed percentage, this percentage having been negotiated in advance. This is the case, for example, in federally-funded research in the United States. In this case, the indirect costs percentage is specified relative to direct costs, not to the total request. Indirect costs include expenses such as the salaries of the project manager and administrative staff, renting office space to manage the project, and insurance and legal fees. Indirect costs are expenditures related to administration, human resources, maintenance, utilities, and other general administrative and business support offices. Indirect costs, also referred to as overhead costs, are those expenses that can’t be attributed to a single product.
Direct vs. Indirect Costs
We also could say all the costs that could not be allocated to direct costs are indirect costs. All manufacturing costs that are easily traceable to a product are classified as either direct materials or direct labor. All nonmanufacturing costs are not related to production and are classified as either selling costs or general and administrative costs.
- Some other examples of indirect costs include overhead, security costs, administration costs, etc.
- These overhead costs are the ones left over after direct costs have been computed.
- Also referred to as manufacturing overhead, factory burden, factory overhead, and manufacturing support costs.
- Indirect costs – costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved.
- To turn a profit in your business, you need to make sure your products or services bring in more money than what you put into them.
- Indirect costs are also referred to as overheads, administrative costs, or facility costs.
This will allow for each program or activity represented in the direct costs base to assume their fair share of indirect costs when the rate is applied. An indirect cost rate is simply a device for determining fairly and expeditiously the proportion of general (non-direct) expenses that each project will bear. It is the ratio between the total indirect costs of an applicant and some equitable direct cost base. For example, factory overhead costs can be apportioned to each unit produced by the total number of products manufactured, or based on the number of hours it took to manufacture each product. This helps a company to calculate the overhead cost per unit so that prices can be set accordingly to ensure a profit is made on each product even after incorporating all indirect expenses.
Top 20 Examples: What Are Examples of Direct and Indirect Costs?
A company with a cost pool of manufacturing overhead uses direct labor hours as its cost allocation basis. Finally, the company multiplies the hourly cost by the number of labor hours spent to manufacture a product to determine the overhead cost for that specific product line. You also need to know the difference between direct and indirect costs when filing indirect costs are also referred to as costs. your taxes. Examples of tax-deductible direct costs include repairs to your business equipment, such as your production line. Tax-deductible indirect costs may include rent payments, utilities and certain insurance costs. Cost structure refers to the various types of expenses a business incurs and is typically composed of fixed and variable costs.