Indirect expenses definition

/

What are Indirect Expenses?

Indirect expenses are those expenses that are incurred to operate a business as a whole or a segment of a business, and so cannot be directly associated with a cost object, such as a product, service, or customer. A cost object is any item for which you are separately measuring costs. Examples of indirect expenses are accounting, auditing, and legal fees, as well as business permits, office expenses, rent, supervisor salaries, telephone expense, and utilities.

Indirect expenses may or may not be allocated. For example, office administrative costs are indirect expenses, but are rarely allocated to anything, unless it is corporate overhead and is being allocated to subsidiaries. These types of indirect expenses are considered period costs, and so are charged to expense in the period incurred.

Characteristics of Indirect Expenses

The key characteristics of indirect expenses are as follows:

  • Non-direct attribution. Indirect expenses cannot be directly traced to a single cost object, such as a product, service, or department.

  • General business support. Indirect expenses are incurred for the overall functioning of the business rather than for a specific output.

  • Fixed or semi-variable nature. Many indirect expenses are fixed (e.g., rent, insurance) and do not vary with production levels. Some may be semi-variable, such as electricity bills, which have a fixed base charge and a variable component based on usage.

  • Incurred regardless of output. Indirect expenses are incurred even if no production or sales occur, as they relate to the infrastructure or administration of the business.

  • Not directly influenced by production. While direct expenses fluctuate with production levels (e.g., raw materials), indirect expenses are generally less sensitive to production volume changes.

Related AccountingTools Course

Cost Accounting Fundamentals

Examples of Factory Indirect Expenses

Indirect expenses that are factory overhead will be allocated to those units produced in the factory during the same period that the indirect expenses were incurred, and so will eventually be charged to expense when the products to which they were allocated are sold. Examples of items included in factory overhead are:

  • Production supervisor salaries

  • Quality assurance salaries

  • Materials management salaries

  • Factory rent

  • Factory utilities

  • Factory building insurance

  • Fringe benefits

  • Depreciation

  • Equipment setup costs

  • Equipment maintenance

  • Factory supplies

  • Factory small tools charged to expense

Examples of Administrative Indirect Expenses

Many of the expenses attributed to the administrative function of a business can be classified as indirect expenses. Here are some of the most common ones:

  • Salaries

  • Facility rent

  • Professional fees

  • Insurance

Direct Expenses

The reverse of indirect expenses are direct expenses, which are directly associated with cost objects. Examples of direct costs are as follows: