Definition
The financial accounting term indirect cost is used to describe all costs other than initial direct and direct costs. Typically, indirect costs do not have a clearly attributable relationship to a product or a service. Indirect costs can include selling, general and administrative expenses, advertising, insurance, and taxes.
Explanation
In the accounting profession, indirect costs are those that are not directly assigned to a cost object (project, product, or service). Instead, they are typically allocated to multiple cost objects. For example, income taxes can be allocated based on EBIT, while SG&A might be allocated based on revenues or direct labor hours. Generally, indirect costs fall into two subcategories:
Fixed Costs: includes those activities that do not vary with output. Examples include facility rents, property taxes, warehousing, insurance, and executive salaries.
Variable Costs: includes those activities that vary with output. Examples include transportation and shipping expenses.
While both fixed and variable costs can also be directly attributed to a single cost object, the distinguishing characteristic of an indirect cost is the need to assign it to multiple products or services using an allocator.
Indirect costs should always be charged to expense as incurred, regardless of the revenue recognition method used for a particular transaction.
Related Terms
- The term service transaction cost refers to those business expenses associated with providing services to a customer. Service transaction costs generally fall into three categories: initial indirect costs, direct costs, and indirect costs.
Moneyzine EditorSeptember 21st, 2023 
The financial accounting term direct cost is used to describe those costs that have a clearly attributable relationship to a product or service being performed or the level of services being performed for a customer. Direct costs can include labor, material, and other expenses associated with manufacturing a product or providing a service.Moneyzine EditorJanuary 16th, 2024
The financial accounting term initial direct cost is used to describe those costs that are directly associated with negotiating and completing a service agreement. Initial indirect costs consist of sales commissions, legal fees, creditworthiness checks, preparation of documentation, in addition to other costs that are incremental and directly attributable to the agreement.Moneyzine EditorJanuary 22nd, 2024
