Indirect Costs

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Definition: Indirect Costs

In the production of items or jobs, there are two types of costs related to its production namely, direct costs and indirect costs. Direct costs are those which can be attributed to the job/product or the cost object, for example material costs. They are of variable type only. Indirect costs are those which cannot be traced back to a cost object. Such types of costs are both fixed as well as variable costs.

The metric used to determine the indirect costs for a job is the Indirect Costs Ratio which helps determine the proportion of general (non-direct) expenses that is borne by that very job. It is the ratio of the total indirect costs of a job and some equitable direct cost base.

Indirect costs include costs that are frequently referred to as overhead expenses (for e.g. rent, utilities, etc.) and general and administrative expenses (for e.g. supervision, maintenance, security, etc.)

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