Short definition: An indirect cost, also known as an overhead cost, is an expense that cannot be directly attributed to a specific cost object, such as a product, service, or project.
Explanation: These costs are incurred for the overall operation of a business and are often shared across multiple products, services, or departments. Examples of indirect costs include rent, utilities, administrative salaries, and depreciation of general office equipment.
Example: The cost of electricity used to power a factory is an indirect cost, as it benefits the production of various products and cannot be easily assigned to a single product.
Additional information (optional): Indirect costs are allocated to cost objects using various methods, such as activity-based costing or traditional cost allocation methods. Understanding indirect costs is crucial for determining the true cost of products or services and making informed pricing and profitability decisions.