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What is an Indirect Cost?

An indirect cost cannot be easily matched with a specific cost object. For a refresher we covered cost objects in this post. A cost object is simply something that a company is tracking costs for, it could be a person, product, location, etc. Here are some examples of indirect costs.

A company is tracking costs for specific retail locations. The cost objects are the locations. The cost for the main offices cannot easily be attributed to one specific location and is an indirect cost.

A company is tracking costs for specific product lines that are manufactured in the same plant. The cost objects are the specific product lines. The maintenance for a building that houses the various equipment where numerous product lines are produced is an indirect cost, it cannot be matched to only one product line.

A company is tracking costs for specific clients. The cost of the accounting system cannot be matched to one specific client (the cost objects). Therefore it is an indirect cost.

So indirect costs are not easily matched to a cost object. Another way to look at it is a direct cost is caused by a specific cost object, indirect costs are not. In the last example the accounting system for the company is used to measure the income and expenses associated with the different clients, but the cost is not caused by one specific client. This is an example of a common cost, or one that supports multiple cost objects (in the example multiple clients).

To learn about direct costs visit this blog post.