Indirect overhead definition
/What is Indirect Overhead?
Indirect overhead refers to business expenses that are not directly tied to the production of goods or services but are still necessary for overall operations. These costs include items such as office rent, administrative salaries, marketing expenses, and utilities for corporate offices. Unlike manufacturing overhead, which includes factory-related costs like machine maintenance and factory utilities, indirect overhead supports business functions outside of production. For example, a company's legal fees, accounting services, and IT support costs all fall under indirect overhead because they contribute to the organization’s overall functionality rather than the direct creation of products. Proper management of indirect overhead is crucial for businesses to control expenses, improve profitability, and ensure efficient allocation of financial resources.
Examples of Indirect Overhead
Examples of indirect overhead costs are as follows:
Accounting, auditing, and legal expenses
Administrative salaries
Information technology
Office expenses
Postage and printing
Research and development
Telephone expenses
Related AccountingTools Courses
Accounting for Indirect Overhead
Indirect overhead is charged to expense as incurred, because it is nearly always classified as a period expense. With few exceptions, it is not carried forward into future periods as an asset.
Fraudulent Use of Indirect Overhead
A company intent on improving its reported level of profitability might fraudulently move some elements of indirect overhead into manufacturing overhead, where these elements could be assigned to unsold products, thereby delaying their recognition until a future period. Auditors can spot this fraud by tracing the journal entries used to shift indirect overhead costs into manufacturing overhead cost pools.